Auction Preview: US to sell USD 69bln of 2yr notes at 18:00BST/13:00EDT

Auction History

2-year

• Tail: (prev. -0.4bps, six-auction average 0.1bps)
• High Yield: (prev. 4.204%, six-auction average 4.088%)
• B/C: (prev. 2.60x, six-auction average 2.61x)
• Dealer: (prev. 10.9%, six-auction average 13.1%)
• Direct: (prev. 23.1%, six-auction average 28.3%)
• Indirect: (prev. 66.0%, six-auction average 58.6%)

Primer

The US Treasury will sell USD 69bln of 2yr notes on September 22nd, USD 70bln of 5yr notes on September 23rd, and USD 44bln of 7yr notes on September 24th; all to settle September 30th.

This week's auctions come amid a relatively light US data calendar and with the FOMC now in the rear-view mirror. On a broader macro level, Xi will be visiting the US, potentially providing updates on US/China trade, while the UN General Assembly is taking place, where participants will be looking for further information on Trump's next steps regarding Iran. Nonetheless, with little economic data due and the Fed decision behind us, event risk surrounding this week's auctions is lower than that faced by Treasury supply earlier this month.

Regarding the Fed, Treasuries initially sold off following last week's decision, despite the 25bp hike being widely expected, as the dots signalled another hike by year-end and Chair Warsh maintained a strong emphasis on returning inflation to target. However, much of the move reversed the following day as participants focused on improved Fed credibility and its commitment to restoring price stability. Nonetheless, yields remain substantially elevated compared with the previous auction cycle.

The 2-, 5- and 7-year auctions also sit in the front end and belly of the curve and are therefore not directly impacted by the Treasury's enhanced long-end buyback operations. Note, however, there is a 20-30yr buyback operation scheduled this week.

The 2-year yield currently trades around 4.73%, well above the 4.204% high yield at the August auction, providing a substantially greater outright yield for investors. Meanwhile, the MOVE index trades around 81, up from roughly 74 at the previous auction, suggesting a somewhat more volatile rates backdrop. The previous 2-year auction was strong: the 0.4bp stop-through, strong indirect participation and below-average dealer allocation pointed to healthy underlying demand, particularly given the lower outright yield on offer relative to July. While the lower bid-to-cover and sharp decline in direct participation took some shine off the result, the auction was still better than recent averages and suggested investors were willing to absorb the front-end supply despite the richening versus July.

Overall, while the higher MOVE index points to greater rates volatility than at the previous auction, much of the major event risk is now in the rear-view mirror, with a light US data calendar and the FOMC decision behind us. Meanwhile, the substantial increase in outright yields since the August auction may help attract demand, providing a more appealing entry point for investors.