Auction Preview: US to sell USD 58bln of 3-year notes at 18:00BST/13:00EDT

The current 3-year yield trades around 4.54%, notably above the previous auction's 4.291% high yield, offering investors a more attractive outright yield. The recent move higher in yields has largely followed Friday's strong US labour market report, which prompted markets to rebuild expectations for a September Fed hike.

The MOVE Index is little changed from the prior auction, currently trading around 73 versus roughly 72 around about the prior auction, suggesting a broadly similar volatility backdrop.

The August 3-year auction was strong relative to recent averages, although not quite as strong as the July offering. Today's auction benefits from the substantially higher yield on offer following the strong jobs report. However, all of this week's Treasury supply comes ahead of the US CPI report, a key risk event for September Fed expectations that could temper demand as some participants opt to remain on the sidelines.

Money markets currently lean towards a 25bps hike in September, assigning it around a 58% probability versus 42% for an unchanged rate. Pricing has been volatile in recent weeks: Chair Warsh's hawkish Jackson Hole speech, which placed greater emphasis on inflation, initially boosted hike expectations before Governor Waller's more dovish remarks brought pricing back towards a coin toss, with his September decision heavily dependent on the upcoming inflation data. Last Friday's strong jobs report subsequently saw hawkish bets rebuild. With the Fed providing little forward guidance and stressing data dependence, incoming economic releases have taken on greater importance for near-term policy expectations.

Inflation concerns also remain elevated following the recent rise in oil prices amid renewed strikes between the US and Iran, while Saudi Arabia and the Houthis in Yemen have also exchanged fire. The rise in energy prices adds another source of uncertainty ahead of the aforementioned inflation report.

Overall, the substantially higher outright yield and broadly unchanged volatility backdrop should support today's 3-year auction, while the strong reception to the August offering provides a constructive recent precedent. However, significant event risk lies immediately ahead, particularly Friday's CPI report, which could see some participants remain on the sidelines ahead of greater clarity on the September Fed decision.

Auction History

• Tail: (prev. -0.5bps, six-auction average -0.1bps)
• High Yield: (prev. 4.291%, six-auction average 4.017%)
• B/C: (prev. 2.71x, six-auction average 2.62x)
• Dealer: (prev. 11.7%, six-auction average 14.1%)
• Direct: (prev. 24.0%, six-auction average 20.4%)
• Indirect: (prev. 64.2%, six-auction average 65.5%)