Auction Preview: US to sell USD 13bln of 20yr bonds at 17:00GMT/13:00EDT; will settle on 31st March.

Auction History:

• High Yield: (prev. 4.664%, six-auction avg. 4.689%)
• Tail: (prev. 2.0bps, six-auction avg. -0.0bps)
• Bid-to-Cover: (prev. 2.36x, six-auction avg. 2.63x)
• Dealers: (prev. 17.6%, six-auction avg. 10.9%)
• Directs: (prev. 27.2%, six-auction avg. 27.0%)
• Indirects: (prev. 55.2%, six-auction avg. 62.1%)

Preview

The 20-year reopening auction follows the 3-, 10- and 30-year issuance last week, where demand was stronger further out the curve, likely reflecting lower sensitivity to recent oil-driven volatility following the Iran conflict, and the implications for inflation, and by extension the outlook for interest rates. The 30-year saw a 0.7bps stop-through versus a 1.1bps tail in the 3-year auction.

The 20-year yield currently trades at 4.82%, above both the prior auction high yield and the six-auction average, which could help attract investors into today’s reopening. Following the soft offering in February, investors who were on the sidelines may be more inclined to participate at these higher yield levels.

It is worth noting that sell-side commentary has pointed to a potential reversal lower in yields after the recent upside. Goldman Sachs sees risks around yields increasingly tilted to the downside, while Morgan Stanley has flagged a potential demand-destruction-led move lower in rates. BMO Capital also noted that AI and private credit concerns helped drive 10-year yields as low as 3.93% in February before the Middle East conflict took centre stage, implying scope for rates to decline if oil prices return to pre-war levels.

BMO also highlights that 20-year re-openings have been well received recently, with no tails since December 2024, alongside eight stop-throughs and one on the screws.

Bond volatility remains elevated, although the MOVE index has eased to 85.25 from last week’s peak of 95. Volatility has risen since the onset of the US/Iran conflict, largely driven by oil-induced inflation concerns. Nonetheless, market-based inflation expectations remain relatively anchored, with the 10-year breakeven inflation rate rising from 2.25% at the end of February to 2.36% this week. Former Philadelphia Fed President Harker has suggested that for every USD 10/bbl rise in oil prices, CPI increases by around 0.2%.

Inflation concerns are not the sole focus, with the February jobs report showing a loss of 92k jobs, raising questions about the recent stabilisation in the labour market. However, JOLTS data has shown some improvement, while jobless claims have remained stable. The Fed appears split on their views on whether to focus on the the inflation side of the mandate, or the labour side. 

The 20-year auction also comes ahead of the FOMC rate decision and updated SEPs on Wednesday. While the Fed is widely expected to keep rates unchanged; focus will be on the dot plot, vote split, and commentary around the economic impact of the conflict, which could add to market volatility and potentially keep some participants on the sidelines.

It is also worth bearing in mind that the 20-year JGB auction overnight was solid, which may provide a supportive signal for global duration demand.