Primer: US to sell USD 70bln of 5-year notes at 18:00BST/13:00EDT

• Tail: (prev. 0.2bps, six-auction average 0.6bps)
• High Yield: (prev. 4.393%, six-auction average 4.186%)
• B/C: (prev. 2.37x, six-auction average 2.33x)
• Dealer: (prev. 10.0%, six-auction average 12.9%)
• Direct: (prev. 28.4%, six-auction average 21.8%)
• Indirect: (prev. 61.5%, six-auction average 65.2%)

The US Treasury will sell USD 70bln of 5yr notes on September 23rd and USD 44bln of 7yr notes on September 24th; both to settle September 30th.

This week's auctions come amid a relatively light US data calendar and with the FOMC now in the rear-view mirror. On a broader macro level, Xi will be visiting the US, potentially providing updates on US/China trade, while the UN General Assembly is taking place, where participants will be looking for further information on Trump's next steps regarding Iran. Nonetheless, with little economic data due and the Fed decision behind us, event risk surrounding this week's auctions is lower than that faced by Treasury supply earlier this month.

Regarding the Fed, Treasuries initially sold off following last week's decision, despite the 25bp hike being widely expected, as the dots signalled another hike by year-end and Chair Warsh maintained a strong emphasis on returning inflation to target. However, much of the move reversed the following day as participants focused on improved Fed credibility and its commitment to restoring price stability. Nonetheless, yields remain substantially elevated compared with the previous auction cycle.

The 5- and 7-year auctions sit in the belly of the curve and are therefore not directly impacted by the Treasury's enhanced long-end buyback operations. Note, however, there is a 20-30yr buyback operation scheduled this week, which was recently announced at a maximum of USD 6bln, matching the size of the recent 10-20yr operation.

The 5-year yield currently trades around 4.96%, well above the 4.393% high yield at the August auction, providing a substantially greater outright yield for investors. Meanwhile, the MOVE index trades around 78, up from roughly 74 at the previous auction, suggesting a somewhat more volatile rates backdrop.

The previous 5-year auction was solid. The minimal 0.2bp tail, above-average bid-to-cover, strong direct participation and low dealer allocation pointed to a solid reception, particularly given the lower outright yield compared with July. Indirect participation remained below average, preventing the result from being particularly strong, but demand was clearly improved from the soft July offering.

Overall, while the higher MOVE index points to greater rates volatility than at the previous auction, much of the major event risk is now in the rear-view mirror, with a light US data calendar and the FOMC decision behind us. Meanwhile, the substantial increase in outright yields since the August auction may help attract demand, providing a more appealing entry point for investors. However, Tuesday's 2-year auction was only average despite a similarly substantial backup in yields, suggesting the higher outright yield alone may not be enough to generate particularly strong demand.

Monthly 5-year supply sits in the belly of the curve, so the read runs through the concession built since the prior cycle rather than through buyback operations, which are concentrated at the long end and leave this tenor untouched. The standard sequence for this auction is a pre-sale concession into the WI, then the result judged on tail versus the recent average, bid-to-cover, and the indirect/direct split; the pattern in episodes of rising outright yields is that a better entry point helps demand, but only when volatility is contained, and here implied vol is running above the prior auction's backdrop. The soft read on the preceding 2-year sale, despite a similar yield backup, is the relevant tell: higher carry alone has not been sufficient to pull in end-user demand at the front of the curve, which puts more weight on indirect participation as the swing metric given foreign buyer form at this tenor. Direct bidders stepped up at the previous offering while indirects lagged, so a repeat of that mix would read as domestic-led rather than broad-based. The follow-ons are the 7-year sale the next day, which historically carries the weaker reception of the two, and any concession behaviour in the 5s7s spread into the results. With the policy decision behind and a light data calendar, the auction itself is the week's main rates event risk.