Preview: US to sell USD 22bln of 30-year bonds at 18:00BST / 13:00EDT

Overall, the significantly higher outright yield and additional concession ahead of today's offering could help attract investors, particularly following softer-than-expected US labour and inflation data and the substantial reduction in expectations for an October Fed hike. Wednesday's stellar 10-year auction also provides an encouraging signal for duration demand, while the subsequent 20-30-year buyback could offer some support through potentially improved dealer balance-sheet capacity. However, the 30-year has seen less relative yield concession than the front end and belly, while elevated rate volatility, geopolitical uncertainty and ongoing fiscal concerns could keep some investors sidelined. The upcoming midterm elections and the potential implications for the US fiscal outlook will also remain considerations for long-end investors.

Yields have risen notably over the last month, offering investors a more attractive entry point into this week's auctions. The 30-year yield currently trades around 5.690%, well above the prior auction's high yield of 5.308% and up from 5.660% at the start of the week, providing additional concession ahead of today's offering. However, the flattening of the curve means the concession versus the previous auctions has been greatest at the front end and belly, with the 3-year and 10-year yields having risen around 48bps and 47bps, respectively, compared with around 38bps for the 30-year.

The auction follows several key developments from the prior week. August PCE printed softer than expected, albeit largely due to methodology changes, while the September NFP report was also soft. Fed commentary has also leaned more dovish, with key officials including FOMC Vice Chair Williams and Fed Vice Chair Jefferson stressing there is no need to rush further rate hikes, substantially reducing market pricing for an October move. Although the likelihood of an October hike has fallen considerably, to around 20% at the time of writing, a further 25bps hike remains fully priced by December.

However, the recent move higher in yields has also coincided with a surge in rates volatility, with the MOVE index currently around 102, well above the mid-70s levels seen around the September offerings but down from the 113 peak seen earlier in the week. The auction also follows Wednesday's stellar 10-year offering, which saw a sizeable 1.7bp stop-through and an exceptionally low dealer takedown of 2.5%, suggesting strong appetite for duration at elevated yield levels despite heightened volatility.

The geopolitical backdrop also remains fluid. There have been few fresh developments between the US and Iran, although reports last week suggested Trump could resume strikes on Iran after the midterms. Meanwhile, tensions between Yemen and Saudi Arabia remain in focus, with reports on Monday of a large explosion at an oil refinery in Jeddah, keeping energy supply and inflation risks in focus. On the supply side, IEA members have expressed support for accelerating the oil stock releases announced as part of the collective action in March, potentially bringing around 100mln bbls to the market and helping alleviate some of the upward pressure on energy prices.

Also of note, reports stated that Japan's GPIF did not discuss asset allocation at its September meeting. Bloomberg had noted that investors were watching whether the roughly USD 2tln fund could increase its allocation target for domestic bonds after a portfolio review appeared on the agenda of an unusually timed board meeting during the August summer break. The apparent lack of discussion around asset allocation may alleviate some concerns over an imminent shift towards domestic Japanese bonds at the expense of foreign assets, although it does not necessarily imply increased demand for US Treasuries.

Today's auction will also be the final 30-year offering before the November 3rd midterm elections, with prediction markets assigning around a 66% probability to a Democratic sweep at the time of writing. Such an outcome could result in greater legislative gridlock, with President Trump remaining in office but Democrats controlling both chambers of Congress, potentially making further tax cuts or deficit-financed spending more difficult to pass. However, the fiscal implications would ultimately depend on the policies pursued after the election. Research from Guardian Capital shows that, across the last 16 midterm elections, the 10-year Treasury yield declined by an average of 36bps over the subsequent 12 months when the president's party lost at least one previously held chamber of Congress, compared with an average 56bps increase when the president's party retained control. With yields currently elevated, the prospect of a change in Congressional control could therefore provide another consideration for investors assessing current entry levels, although the historical relationship does not guarantee a similar move following this year's election.

Another factor to consider is the Treasury's 20-30-year buyback operation scheduled for one hour after the auction. The operation could provide some support for demand by allowing dealers and other holders to sell existing long-end securities back to the Treasury, potentially freeing up balance-sheet capacity and facilitating the absorption of new issuance. However, the Treasury will only accept offers deemed economically attractive, with purchases capped at USD 6bln. As such, the actual amount purchased could fall short of the maximum, limiting the potential support for the auction.

• Tail: (prev. -2.7bps, six-auction average -0.1bps)
• High Yield: (prev. 5.308%, six-auction average 5.087%)
• B/C: (prev. 2.61x, six-auction average 2.41x)
• Dealer: (prev. 2.2%, six-auction average 10.3%)
• Direct: (prev. 18.3%, six-auction average 20.6%)
• Indirect: (prev. 79.5%, six-auction average 69.1%)