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

• High Yield: (prev. 4.217%, six-auction avg. 4.132%)
• Tail: (prev. 0.7bps, six-auction avg. 0.3bps)
• Bid-to-Cover: (prev. 2.45x, six-auction avg. 2.49x)
• Dealers: (prev. 12.7%, six-auction avg. 9.8%)
• Directs: (prev. 12.8%, six-auction avg. 19.2%)
• Indirects: (prev. 74.5%, six-auction avg. 71.0%)

Preview:

The 10-year auction comes after a strong 3-year offering, which saw a notable stop-through driven by a surge in indirect demand, despite weak direct participation. A similar demand composition could be seen in today’s auction.

The key development since the 3-year auction has been a shift in the geopolitical backdrop, with President Trump extending the Iran deadline by two weeks and Iran agreeing to reopen the Strait of Hormuz. This has driven a bull steepening of the Treasury curve, led by the front-end as oil prices have declined.

While lower yields may reduce some of the outright attractiveness versus earlier in the week, the improvement in the geopolitical outlook and reduction in expected volatility could help draw participants back into the market following the weak March supply.

The 10-year yield currently trades around 4.24%, slightly above the March high yield of 4.217% and above the six-auction average, which should still support demand. In addition, the longer end of the curve has been less volatile than the front-end, which may make the sector more attractive for investors wary of short-end sensitivity to geopolitical developments.

The MOVE index has moderated from March highs near 115 to around 83, but remains elevated relative to pre-conflict levels near 60 and broadly in line with levels seen at the time of the March 10-year auction.

Looking at recent demand trends, March auctions saw relatively stable indirect demand (a proxy for foreign participation), while direct demand fell sharply, suggesting domestic real money accounts stepped back amid heightened volatility. If volatility concerns persist, a similar dynamic could be seen, although the improved backdrop may support a more balanced outcome.