Auction Preview: US to sell USD 39bln of 10-year notes at 18:00BST/13:00EDT

Auction History

• Tail: (prev. -0.1bps, six-auction average 0.3bps)
• High Yield: (prev. 4.538%, six-auction average 4.309%)
• B/C: (prev. 2.57x, six-auction average 2.47x)
• Dealer: (prev. 9.5%, six-auction average 10.7%)
• Direct: (prev. 12.3%, six-auction average 19.9%)
• Indirect: (prev. 78.2%, six-auction average 69.4%)

Preview

The 10-year yield currently trades around 4.56%, above both the prior auction's 4.538% high yield and the six-auction average of 4.309%. Since the June auction, yields have traded within a 4.375%-4.57% range and currently sit at the highest level seen over that period after the US revoked Iran's licence to produce, deliver and sell energy products, while President Trump stated this morning that the ceasefire is over.

The renewed geopolitical tensions have lifted crude prices and reignited inflation concerns, contributing to the recent backup in Treasury yields. Rate volatility has also picked up, with the MOVE Index rising back to around 70 from lows near 65, although it remains below the roughly 75 level seen at the time of the previous 10-year auction.

Since the prior 10-year sale, the macro backdrop has evolved considerably. The US and Iran formally signed the memorandum of understanding, prompting a sharp decline in oil prices before the recent escalation reversed part of that move. Meanwhile, the June FOMC delivered a hawkish shift under Chair Warsh, with the Committee removing forward guidance and signalling a stronger commitment to price stability. Although markets initially repriced for a more aggressive Fed, those expectations were partially unwound following the softer June nonfarm payrolls report. Warsh's subsequent appearance at the ECB's Sintra Forum largely reiterated the June FOMC message, although he acknowledged that inflation expectations had eased during his first month as Chair.

The Post-FOMC Treasury supply has generally been well absorbed, although performance has varied across maturities. The 5-year TIPS, 2-year and most recent 3-year auctions all saw strong demand, while the 5-year tailed modestly and the 7-year stopped on the screws. Today's sale marks the first benchmark 10-year auction since the hawkish June FOMC.

Overall, the auction benefits from elevated outright yields and a recent run of strong Treasury auction results. However, the renewed geopolitical tensions, higher oil prices and the modest pickup in rate volatility could temper demand at the margin. While current yields remain attractive by recent standards, today's sale will provide another test of investor appetite amid an increasingly fluid macro backdrop.