[AUCTION PREVIEW] US to sell USD 69bln of 2-year notes and USD 70bln of 5-year notes on July 27th, followed by USD 44bln of 7-year notes on July 28th.
Auction Preview: US to sell USD 69bln of 2-year notes and USD 70bln of 5-year notes on July 27th, followed by USD 44bln of 7-year notes on July 28th.
The 2-year auction will take place today at 16:30BST/11:30EDT, followed by the 5-year at 18:00BST/13:00EDT. The 7-year auction will take place on Tuesday, July 28th at 18:00BST/13:00EDT.
The 2-year yield currently trades around 4.307%, above the 4.189% high yield seen at the prior tap, while the 5-year trades around 4.395%, comfortably above the previous auction's 4.200% high yield. The 7-year yield also remains above the 4.260% high yield seen at the June auction, currently at 4.509%. Although yields have moved off their recent peaks following the sharp decline in oil prices on Monday, higher outright yields relative to the previous auctions should provide a more attractive entry point for investors.
The decline in yields on Monday 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 and some of the recent geopolitical and inflation risk premium come out of 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 2-year auction was strong, stopping through by 0.3bps as an increase in direct participation helped offset softer indirect demand. The 5-year auction was soft, tailing by 0.7bps despite stronger direct demand, as indirect participation fell below its recent average. Meanwhile, the 7-year auction was average, stopping on the screws with a broadly in-line bid-to-cover ratio, although it similarly saw stronger direct demand offset by weaker indirect participation.
This week's auctions also arrive immediately ahead of Wednesday's FOMC decision. The Fed is widely expected to leave rates unchanged, although markets have increased expectations for 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 2-, 5- and 7-year auctions benefit from higher outright yields than their respective June offerings and an easing of geopolitical tensions following the weekend pause in US-Iran strikes. Those factors could support demand, particularly after the strong 2-year auction last month. However, bond-market volatility remains notably higher than at the previous offerings, while uncertainty surrounding Wednesday's FOMC decision provides an additional risk for investors. Today's 5-year auction will be particularly interesting following the soft June offering, while the 7-year on Tuesday will provide a further test of demand heading into the Fed.
Auction History:
US 2-YEAR NOTE RECENT AUCTION HISTORY:
- High Yield: (prev. 4.189%, six-auction avg. 3.841%)
- Tail: (prev. -0.3bps, six-auction avg. 0.1bps)
- Bid-to-Cover: (prev. 2.64x, six-auction avg. 2.63x)
- Dealers: (prev. 10.2%, six-auction avg. 12.6%)
- Directs: (prev. 34.3%, six-auction avg. 29.2%)
- Indirects: (prev. 55.5%, six-auction avg. 58.2%)
US 5-YEAR NOTE RECENT AUCTION HISTORY:
- High Yield: (prev. 4.200%, six-auction avg. 3.959%)
- Tail: (prev. 0.7bps, six-auction avg. 0.6bps)
- Bid-to-Cover: (prev. 2.35x, six-auction avg. 2.33x)
- Dealers: (prev. 12.9%, six-auction avg. 12.9%)
- Directs: (prev. 25.5%, six-auction avg. 21.4%)
- Indirects: (prev. 61.6%, six-auction avg. 65.6%)
US 7-YEAR NOTE RECENT AUCTION HISTORY:
- 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%)
The 2-, 5-, 7-year sequence is the Treasury's standard end-of-month coupon slate, and it has historically behaved as a test of demand at the front and belly rather than a market-moving event in itself; the information content sits in the indirect bid, the dealer takedown and the stop-through or tail relative to the when-issued level at 13:00EDT. The recurring pattern in this slate is that the 2-year draws reliable domestic demand, the 5-year is the usual soft point in the curve, and the 7-year, trading close to the cheapest part of the nominal curve, tends to price a concession; the prior round here fits that form, with a strong 2-year, a tailing 5-year and an average 7-year, and indirect participation fading across all three while directs picked up the slack. Supply taken within hours of an FOMC decision adds a familiar wrinkle: bidders typically demand extra concession ahead of the statement, and with a non-trivial probability of a hike still priced, the front-end sale carries more event risk than the belly. The other live channel is crude, where the easing in hostilities has pulled some inflation risk premium out of yields; whether that bid holds through the auctions depends on the geopolitical tape remaining quiet, a condition that has reversed quickly in comparable episodes. The tells are the indirect share versus its recent average, the size of any 5-year tail after last month's soft result, and whether the 7-year concession builds or fades going into the Fed. Higher outright yields than the prior taps provide a cushion, but elevated rate volatility has tended in past episodes to widen tails even where auctions ultimately clear.