Preview: US to sell USD 44bln of 7yr notes at 18:00BST/13:00EDT

US 7-YEAR NOTE AUCTION HISTORY:

• High Yield: (prev. 4.290%, six-auction avg. 4.076%)
• Tail: (prev. -0.1bps, six-auction avg. 0.2bps)
• Bid-to-Cover: (prev. 2.52x, six-auction avg. 2.49x)
• Dealers: (prev. 10.4%, six-auction avg. 10.9%)
• Directs: (prev. 11.2%, six-auction avg. 24.3%)
• Indirects: (prev. 78.4%, six-auction avg. 64.8%)

Preview:

The current 7-year yield trades around 4.253%, beneath the prior auction’s high yield of 4.290%, but above the six-auction average of 4.076%. Yields have moved higher over the past week following a hawkish shift from the FOMC last week, although did see notable downside on Wednesday in wake of a slump in oil prices and haven demand for T-Notes. At the Fed's June meeting, the Committee removed forward guidance from its statement, reinforced its commitment to price stability, and delivered a more hawkish set of economic projections, helping support to yields in the front-end and belly of the curve. The hawkish Fed has offset some of the downside pressure that would typically accompany the sharp decline in energy prices following the US-Iran MoU and the reopening of the Strait of Hormuz, despite the aforementioned weakness on Wednesday.

BofA's MOVE Index briefly retraced all of the US-Iran conflict-related upside before moving back to around 69 at the time of writing, broadly matching the level seen at the time of the previous 7-year auction. While volatility remains elevated relative to the start of the year, it is no longer a significant headwind for Treasury demand.

Recent auction results provide mixed but generally constructive signals. The June 3-year auction was slightly soft relative to recent averages, although demand improved from the prior month, and both direct and indirect participation increased. Since then, geopolitical uncertainty has eased considerably following the US-Iran agreement. The first nominal coupon auction following the agreement, the 20-year bond sale, was met with very strong demand, suggesting investors were willing to add duration as a major source of uncertainty was removed.

The 2-year auction on Tuesday was also strong, marking the first stop-through in that maturity since January 2026. Demand was driven primarily by an increase in direct participation, while indirect demand softened slightly. The key question for today’s auction is whether the recent backup in yields can entice direct bidders back into the 7-year sector while maintaining the strong foreign participation seen at the previous auction.

The 5-year auction on Wednesday was weaker than usual, highlighted by the 0.7bps tail, against the previous 0.1bps tail and the six-auction average of a 0.5bps tail. Bid-to-cover was in line with recent averages at 2.35x (prev. 2.34x, avg. 2.33x). In terms of the breakdown, dealers took 12.9% (prev. 12.8%, avg. 12.3%), directs took a chunky 25.5% (prev. 12.3%, avg. 22.4), while Indirect demand tumbled to 61.6% (prev. 74.9%, avg. 65.3%).

The policy backdrop has also shifted notably since the previous 7-year auction. The June FOMC meeting delivered a clear hawkish message. Markets are currently pricing around 34bps of tightening through year-end, fully pricing one 25bps rate hike and assigning roughly a 48% probability to a second. Meanwhile, Bank of America expects the FOMC to deliver three rate hikes this year, albeit they are the notably hawkish outlier.