Preview: US to sell USD 58bln of 3-year notes at 18:00BST/13:00EDT

US 3YR AUCTION RECENT HISTORY:

• High Yield: (prev. 3.965%, six-auction avg. 3.697%)
• Tail: (prev. 0.6bps, six-auction avg. -0.1bps)
• Bid-to-Cover: (prev. 2.54x, six-auction avg. 2.61x)
• Dealers: (prev. 16.9%, six-auction avg. 13.9%)
• Directs: (prev. 20.1%, six-auction avg. 22.2%)
• Indirects: (prev. 63.0%, six-auction avg. 63.9%)

Primer: 

The US Treasury will sell USD 58bln of 3-year notes, with yields currently trading around 4.19%, above both the prior auction's high yield of 3.965% and the six-auction average of 3.697%, potentially offering the highest outright yield since February 2025. Yields have recently climbed amid higher inflation expectations driven by the Iran conflict and elevated energy prices, although oil prices have come off their highs as markets have begun to price in the prospect of de-escalation and a potential agreement between the US and Iran.

Despite the pullback in energy prices, yields have remained higher, particularly in the front-end after strong US economic data, most notably the May nonfarm payrolls report, which reinforced the view that the labour market remains stable, if not strong outright. This has allowed the Fed to focus more heavily on the inflation side of its mandate, with money markets now fully pricing in one 25bps rate hike by year-end. The stronger labour market backdrop has also reduced concerns about near-term economic weakness, potentially making the higher yield levels more attractive for real money buyers.

The geopolitical backdrop also appears somewhat more constructive. While strikes between Israel and Iran over the weekend highlighted how fluid the situation remains, President Trump subsequently urged restraint from both sides, with reports suggesting Israel and Iran have largely adhered to those requests for now. Reports also suggest negotiations remain active, with efforts underway to reach a memorandum of understanding as soon as this week.

The recent repricing higher in front-end yields has improved the outright yield on offer for investors, which may help support demand ahead of this week's CPI release (CPI on Wednesday, PPI on Thursday) and the longer-dated Treasury supply due later in the week (10s on Wednesday, 30s on Friday). However, given that the auction takes place ahead of the May CPI data, the auction may be approached with some caution among investors. While the higher yield environment may attract buyers, others may prefer to remain on the sidelines until after the report provides more clarity.

The MOVE index, a measure of Treasury market volatility, currently trades at 76, broadly unchanged from the level seen at the time of the May offering. To recap, the May 3-year auction was weak, printing a 0.6bps tail versus a 1.2bps stop-through at the prior auction, and a six-auction average 0.1bps stop-through. The softer demand at the previous auction may leave scope for some improvement this month, particularly given the higher yield on offer and the broadly unchanged volatility backdrop.