Primer: US to sell USD 39bln of 10-year notes at 18:00BST/13:00 EDT

The 10-year yield currently trades around 4.850%, notably above the previous auction's 4.683% high yield, offering investors a more attractive outright yield. There has also been a notable move higher in yields today, particularly in recent trade after Treasury announced it will buy up to USD 6bln of 10-20yr nominal coupons on Thursday, above its initial guidance for operations to be "at least" double the previous USD 2bln maximum. However, the USD 6bln cap disappointed some market expectations, which had been as high as USD 10bln, seeing the 10-year yield rise from around 4.80% to 4.85%. The resulting cheapening provides some additional concession immediately ahead of today's auction. Meanwhile, the MOVE Index trades around 76, broadly in line with levels seen around last month's offering.

Regarding Fed policy, money markets currently lean towards a 25bp hike in September, assigning it around a 62% probability versus 38% for an unchanged rate. Pricing has been volatile in recent weeks: Chair Warsh's hawkish Jackson Hole speech, which placed greater emphasis on inflation, initially boosted hike expectations before Governor Waller's more dovish remarks brought pricing back towards a coin toss, with his September view heavily dependent on the upcoming inflation data. Last Friday's strong jobs report subsequently saw hawkish bets rebuild. With the Fed providing little forward guidance and stressing data dependence, incoming economic releases have taken on greater importance for near-term policy expectations.

Inflation concerns also remain elevated following the recent rise in oil prices amid renewed strikes between the US and Iran, including attacks involving oil tankers overnight, while Saudi Arabia and the Houthis in Yemen have also exchanged fire. The rise in energy prices adds another source of uncertainty ahead of this week's inflation data.

The August 10-year auction was better than average, although not as strong as July's particularly impressive offering. The marginal 0.1bp tail took some shine off the result, but the above-average bid-to-cover, strong indirect participation and below-average dealer allocation pointed to healthy underlying demand for duration. Direct demand also improved notably from the prior auction, helping offset some of the decline in indirect participation.

Overall, the substantially higher outright yield versus August should support today's auction, while the latest cheapening following the USD 6bln buyback announcement has provided some additional concession immediately ahead of the offering. Volatility is broadly unchanged from the August auction, providing a relatively stable backdrop. However, significant event risk remains, with PPI and CPI due Thursday and Friday ahead of next week's FOMC, which could temper demand as participants await greater clarity on the September rate decision.