Auction Preview: US to sell USD 69bln of 2-year notes at 16:30BST/11:30EDT and USD 70bln of 5-year notes at 18:00BST/13:00EDT

Front-end auctions were notably weak in March, as elevated volatility and a surge in oil prices weighed on demand, with higher yields failing to attract buyers. The softness was driven by a sharp drop in direct participation, suggesting real money accounts stepped to the sidelines amid heightened uncertainty.

April has seen a mixed backdrop. The 3-year auction was very strong, although this was driven by a surge in indirect demand to record levels, while direct participation fell further, highlighting continued caution among real money accounts. Further out the curve, demand has been less consistent, with a mixed 10-year, weak 30-year, and solid 20-year auction.

Today’s 2- and 5-year auctions therefore come against a more balanced but still uncertain backdrop. The strong 3-year may offer some encouragement for front-end demand, although the reliance on indirect bidders suggests underlying demand remains fragile. In addition, the dual auction format could dilute demand, as participants allocate capital across both maturities.

From a valuation perspective, yields remain relatively attractive. The 2-year trades at 3.79%, below the prior 3.936% high yield but above the 3.577% six-auction average. The 5-year is at 3.81%, also below the prior 3.98% but above the 3.725% average.

Meanwhile, volatility has eased, with the MOVE index around 70 versus ~100 at the time of the March auctions, which should support demand. However, the geopolitical backdrop remains fluid, with oil prices still elevated and continuing to drive front-end rate expectations.

Looking ahead, event risk is elevated, with the FOMC decision, Q1 GDP, PCE, and ISM Manufacturing PMI all due this week, which could keep front-end volatility elevated.

Overall, while lower volatility and still-attractive yields may support demand, the recent weakness in direct bidding and reliance on indirect demand suggests risks remain for another soft outcome, particularly with two auctions on the same day.

US 2-YEAR NOTE AUCTION RECENT HISTORY:

• High Yield: (prev. 3.936%, six-auction avg. 3.577%)
• Tail: (prev. 1.8bps, six-auction avg. 0.1bps)
• Bid-to-Cover: (prev. 2.44x, six-auction avg. 2.60x)
• Dealers: (prev. 24.1%, six-auction avg. 12.8%)
• Directs: (prev. 16.5%, six-auction avg. 29.8%)
• Indirects: (prev. 59.4%, six-auction avg. 57.4%)

US 5-YEAR NOTE AUCTION RECENT HISTORY:

• High Yield: (prev. 3.980%, six-auction avg. 3.725%)
• Tail: (prev. 1.4bps, six-auction avg. 0.5bps)
• Bid-to-Cover: (prev. 2.29x, six-auction avg. 2.35x)
• Dealers: (prev. 15.6%, six-auction avg. 11.4%)
• Directs: (prev. 22.5%, six-auction avg. 26.5%)
• Indirects: (prev. 61.9%, six-auction avg. 62.1%)