PREVIEW: US to sell USD 16bln of 20-year bonds at 18:00BST/13:00EDT

• High Yield: (prev. 5.163%, six-auction avg. 4.929%)
• Tail: (prev. 0.5bps, six-auction avg. -0.0bps)
• Bid-to-Cover: (prev. 2.64x, six-auction avg. 2.62x)
• Dealers: (prev. 14.7%, six-auction avg. 11.5%)
• Directs: (prev. 16.2%, six-auction avg. 21.8%)
• Indirects: (prev. 69.1%, six-auction avg. 66.7%)

Primer

The 20-year yield currently trades around 5.19%, marginally above the previous auction's 5.163% high yield and comfortably above the six-auction average of 4.929%. However, the yield is now around 8bps below Monday's closing level after the US Treasury announced it will increase the size of its liquidity-support buyback operations in the long end of the curve. The subsequent richening therefore reduces some of the outright yield concession that had previously made today's offering look particularly attractive.

The Treasury curve had steepened notably since the latest FOMC decision, where Chair Warsh continued to avoid providing forward guidance while suggesting that the recent tightening in financial conditions was helping the Fed achieve its goals. His apparent comfort with tighter financial conditions may have contributed to pressure on the long end, with higher long-term yields potentially reducing the amount of tightening required through the policy rate itself.

Money markets are no longer fully pricing a rate hike by year-end, with the probability of a September hold around 67%, while roughly 23bps of tightening is priced by year-end. The dovish shift follows softer US economic data, including a weak July jobs report alongside sizeable downward revisions to May and June payrolls. Inflation data have also generally leaned softer, bolstering the case for patience from the Fed.

The MOVE Index currently trades around 75, broadly similar to the roughly 72 level seen around the July 20-year offering. The previous auction was soft amid the resumption of the US-Iran conflict and elevated oil prices, with Brent trading around USD 4/bbl above current levels at the time of the offering before subsequently surging back above USD 100/bbl. Those gains ultimately proved short-lived as the US and Iran paused strikes against each other. Nonetheless, geopolitical uncertainty remains elevated, with little concrete progress towards a broader US-Iran agreement and the dispute surrounding the Strait of Hormuz unresolved. Brent currently trades around USD 91/bbl, although that remains well above the August low around USD 78/bbl. Lower oil prices and the cessation of direct US-Iran strikes relative to the previous auction could provide a somewhat more constructive backdrop for demand, although geopolitical risks remain.

Overall, stable rate volatility and reduced geopolitical tensions relative to the previous 20-year offering could support demand at today's auction. The Treasury's decision to increase long-end liquidity-support buybacks could also provide a more constructive technical backdrop for duration, given the prospect of a larger Treasury presence in the secondary market, improving liquidity. However, the announcement has already driven a sizeable richening at the long end, with the 20-year yield falling around 8bps from Monday's close and thereby reducing the concession available to investors ahead of the auction. Recent long-end supply also warrants some caution, with the August 30-year auction proving weak despite elevated outright yields. Today's auction will therefore test whether the improved technical backdrop from increased Treasury buybacks is sufficient to offset the reduced yield concession following the long-end rally.