Quicktake On Last Week's Rate Rout

JP Morgan analysts posited last week's "compromised market microstructure and fragile liquidity were the key drivers of last week's US Treasury sell-off, with the 5- and 7-year points on the curve most vulnerable."

• The bulk of the rise in US rates can be justified by the upward growth revisions and accompanying inflation expectations as a 2pct-pt increase in growth implies a 30 to 40bp rise in rates.
• The market's pricing for the timing of the first hike in 1Q23 and 50bp by early 2024 seems out of line with fundamentals, and we believe that a steep decline in market depth contributed to the outsized moves in yields this week.
• Primary dealers took down double their usual market share, highlighting the liquidity risk. There is little evidence of convexity hedging given spread/yield counter-directionality.