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

Auction History

• Tail: (prev. 0.3bps, six-auction average 0.1bps)
• High Yield: (prev. 4.192%, six-auction average 3.793%)
• B/C: (prev. 2.64x, six-auction average 2.61x)
• Dealer: (prev. 15.3%, six-auction average 15.0%)
• Direct: (prev. 21.0%, six-auction average 22.5%)
• Indirect: (prev. 63.7%, six-auction average 62.5%)

Preview

The 3-year yield currently trades around 4.15%, below the previous auction high yield but still comfortably above the six-auction average of 3.793%. Yields have declined since the soft June jobs report, prompting markets to push back Fed tightening expectations. Pricing for a hike has been pushed out towards December, vs September/October prior to the release. 

At Sintra, Chair Warsh was less hawkish than some had expected and largely reiterated the June FOMC's messaging. Albeit, he acknowledged that inflation expectations have declined over his first four weeks in office. 

The June 3-year auction was marginally firmer than previous sales but remained soft relative to recent averages, with direct demand still subdued while indirect participation remained stable. The subsequent 2-year auction was met with strong demand, suggesting investors were comfortable adding front-end duration at the higher yield levels seen after the June FOMC. 

Since the last 3-year tap, rate volatility has eased considerably, with the MOVE Index falling from around 77 to roughly 65 at the time of writing. Lower volatility could help support investor demand, partially offsetting the slightly lower yield available this month. 

Overall, the lower yield on offer presents a modest headwind for demand, and means that this sale will be a test for demand resilience in the context of the post-NFP yield pullback. However, the shift towards a softer macro backdrop and reduced rate volatility could help support bidding, while yields remain comfortably above the six-auction average.