J.P.Morgan Think 5-Year Supply Requires Further Concession

Ahead of Tuesday’s 5-Year Tsy auction J.P.Morgan note that “Five-Year yields have risen more than 90bp since the August auction, and tomorrow’s auction is likely to result in the highest 5-Year auction yield since September 2007.”

• “Moreover, the 5-Year sector appears somewhat cheap after adjusting for the level of rates and the shape of the curve.”
• “Further, the WI roll opened at -0.25bp, in line with our fair value estimate, and continues to trade at that level, modestly underperforming the erosion of carry.”
• “Despite the aggressive rise in yields and modestly cheap valuations along the curve, we think tomorrow’s auction may be difficult to digest given that the recent volatility and decline in market liquidity over recent sessions has likely limited auction set-up trades. Thus, we think tomorrow’s auction is likely to require a further concession from current levels.”