J.P.Morgan Suggest 30-Year Supply Will Require Concession

Ahead of Thursday’s 30-Year auction J.P.Morgan note “since the December auction 30-Year yields have increased 17bp but are still trading more than 30bp below their local peak around year-end, and we don’t think yields look particularly compelling at these levels.”

• “Certainly the long-end has underperformed along the curve in recent weeks, and we find that the 10s/30s curve now appears roughly 7bp too steep after adjusting for medium-term Fed policy and inflation expectations.”
• “However, we still think the 10s/30s curve should be biased steeper from here as we approach the end of the Fed’s tightening cycle.”
• “Moreover, Treasury market depth has remained poor to start the year, bucking the typical seasonal trend, which could make the long-duration supply more difficult to digest.”
• “Lastly, 30-Year auction tails tend to be correlated with inflation surprises, and a firmer-than-expected CPI print tomorrow could result in weaker demand for tomorrow’s auction.”
• “Overall, despite somewhat cheap valuations along the curve, and while recognizing the uncertainty around tomorrow’s CPI release, we think that tomorrow’s auction is likely to require a further concession from current levels.”