Auction Preview: US to sell USD 44bln of 7-year notes at 18:00BST/13:00EDT

The 7-year yield currently trades around 4.488%, comfortably above the 4.260% high yield seen at the June auction. Although yields have retraced from last week's peaks following Monday's sharp decline in oil prices, outright yields remain more attractive than at the previous offering, providing a potentially more favourable entry point for investors.

The decline in yields this week follows an easing of geopolitical tensions after a weekend without strikes between the US and Iran, breaking a run of 13 consecutive nights of US attacks on Iran and retaliatory strikes against US assets in the Gulf. The pause has seen crude prices tumble, removing some of the recent geopolitical and inflation risk premium from Treasuries. An easing of geopolitical uncertainty could provide a more constructive backdrop for this week's supply, although the situation remains fluid.

Rate volatility, however, remains elevated relative to the previous auctions. The MOVE Index currently trades around 77, up from roughly 65 around the time of the June 2-, 5- and 7-year offerings, reflecting the sharp swings in oil prices, inflation expectations and Fed pricing seen over recent weeks.

The previous round of supply produced mixed results. The June 7-year auction was broadly average, stopping on the screws with an in-line bid-to-cover ratio, although stronger direct demand was offset by weaker indirect participation. Meanwhile, Monday's supply was also mixed, with the 2-year auction producing a strong result while the subsequent 5-year tailed. Some of the concession into the 5-year offering had faded following the strong 2-year sale, potentially reducing the attractiveness of the yield on offer. 

This week's auctions also arrive immediately ahead of Wednesday's FOMC decision. The Fed is widely expected to leave rates unchanged, although markets continue to price some risk of further tightening following the recent surge in energy prices. Money markets still assign roughly a 35% probability to a 25bp hike on Wednesday, leaving some monetary policy uncertainty hanging over the auctions. However, the sharp decline in oil prices following the weekend pause in hostilities may temper some of those expectations if sustained.

Overall, the auction benefits from higher outright yields than the June offering and a reduction in geopolitical tensions following the weekend pause in US-Iran strikes. Those factors should provide a supportive backdrop for demand. However, bond market volatility remains elevated relative to June, while Wednesday's FOMC decision continues to inject a degree of uncertainty into the rates outlook.

• High Yield: (prev. 4.260%, six-auction avg. 4.131%)
• Tail: (prev. 0.0bps, six-auction avg. 0.3bps)
• Bid-to-Cover: (prev. 2.50x, six-auction avg. 2.48x)
• Dealers: (prev. 12.8%, six-auction avg. 11.4%)
• Directs: (prev. 29.7%, six-auction avg. 24.0%)
• Indirects: (prev. 57.6%, six-auction avg. 64.5%)