Preview: US to sell USD 58bln of 3-year notes on Oct 6th, USD 39bln of 10yr notes on Oct 7th, and USD 22bln of 30-year bonds on Oct 8th; all to settle on October 15th

Yields have risen notably over the last month, offering investors a more attractive entry point into this week's auctions. The 3-year yield currently trades at 4.957%, well above the prior auction's high yield of 4.474%, while the 10-year trades at 5.300% versus the prior 4.834%, and the 30-year at 5.660% versus the prior 5.308%. The flattening of the curve means the concession versus the previous auctions has been greatest at the front end and belly: the 3-year yield has risen around 48bps, the 10-year around 47bps and the 30-year around 35bps.

These auctions follow 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 22% 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 113, well above the mid-70s levels seen around the September offerings. The 5- and 7-year auctions at the end of September were also conducted against a backdrop of elevated volatility and both saw weak demand, highlighting the potential for heightened volatility to keep some investors sidelined despite the more attractive outright yields.

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.

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.

The upcoming auctions will also be the last round of supply before the November 3rd midterm elections, with prediction markets currently assigning around a 66% probability to a Democratic sweep. Such an outcome would likely 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. Guardian notes this could reflect markets viewing a fully aligned government as more willing to spend at the expense of fiscal balances. 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.

Overall, the significantly higher outright yields 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. The apparent lack of an imminent GPIF allocation shift towards domestic Japanese bonds may also remove one potential headwind for foreign-asset demand. However, the sharp rise in the MOVE index and elevated rates volatility could keep some investors sidelined, particularly following the weak reception seen at the recent 5- and 7-year auctions. Participants will also be cognizant of the upcoming midterm elections in early November and the potential implications for the US fiscal outlook.

• Tail: (prev. -0.1bps, six-auction average -0.3bps)
• High Yield: (prev. 4.474%, six-auction average 4.166%)
• B/C: (prev. 2.72x, six-auction average 2.65x)
• Dealer: (prev. 10.9%, six-auction average 12.6%)
• Direct: (prev. 26.9%, six-auction average 21.5%)
• Indirect: (prev. 62.1%, six-auction average 65.9%)

• Tail: (prev. -1.5bps, six-auction average -0.3bps)
• High Yield: (prev. 4.834%, six-auction average 4.564%)
• B/C: (prev. 2.71x, six-auction average 2.54x)
• Dealer: (prev. 4.3%, six-auction average 8.8%)
• Direct: (prev. 16.5%, six-auction average 17.0%)
• Indirect: (prev. 79.2%, six-auction average 74.1%)

• 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%)