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

J.P.Morgan note that Wednesday will see Treasury auction “$53bn 5-Year notes, $2bn smaller than last month. Since the last auction, 5-Year yields have risen 33bp, though they are nearly 8bp off the highs reached two weeks ago. The sector appears slightly expensive along the curve after adjusting for the level of rates and the slope of the curve and we note that market depth in the 5-Year sector is particularly depressed and now stands at the lowest levels since April 2020, when the market was just coming out of the COVID crash. The WI roll opened at +0.50bp and is now trading at -0.25bp. Despite a smaller auction size than last month, we think tomorrow’s auction will require some concession, given slightly rich valuations along the curve and weak liquidity in the sector, but we recognize that with short duration positioning still elevated, this could help facilitate a smoother auction process as investors might take advantage of this liquidity event to reduce shorts.”