US Treasury Auction Previews: US to sell 3-year notes, 10-year notes and 30-year bonds this week

The Treasury this week will sell USD 58bln of 3-year notes on Tuesday, USD 42bln of 10-year notes on Wednesday and USD 25bln of 30-year bonds on Thursday; all to settle August 17th.

This week's auctions come on the back of a weak July US jobs report and around the release of July CPI. The 3-year auction will take place before the inflation report, leaving bidders exposed to event risk the following morning. The 10-year auction will take place several hours after CPI on Wednesday, while the 30-year will follow a day later, meaning the inflation report and subsequent repricing of Fed expectations could have a bearing on demand for duration.

Outright yields are currently higher than at the previous auctions. The 3-year yield trades around 4.31%, above the prior auction's 4.179% high yield, despite the recent decline following the weak July NFP report, with yields reversing on the Monday post-NFP as oil climbed. The 10-year trades around 4.70%, above the previous 4.580% high yield, while the 30-year trades around 5.24%, comfortably above the prior auction's 5.058%.

One notable difference is that the August supply comes after the latest FOMC, whereas the July auctions took place beforehand. The post-FOMC reaction was characterised by a pronounced steepening of the Treasury curve, with the long end selling off as Chair Warsh maintained his reluctance to provide forward guidance and suggested that the tightening in financial conditions had provided the Fed with some comfort. The resulting backup in longer-dated yields could improve the outright attractiveness of the 10- and particularly 30-year offerings, although the greater policy uncertainty may also warrant a higher term premium from investors.

The geopolitical backdrop also remains fluid. The Strait of Hormuz remains closed, although the pace of strikes between the US and Iran has slowed considerably. Negotiations surrounding the reopening of the Strait remain difficult, with Iran seeking compensation for war damages, while Trump has responded by saying the US also wants compensation and has instructed negotiators to raise the issue in talks. The competing demands risk complicating negotiations and leave energy prices—and therefore inflation expectations—a source of volatility for Treasuries.

The MOVE Index, a measure of Treasury market volatility, currently trades around 72, broadly comparable with the 66-72 range seen during the week of the previous 3-, 10- and 30-year offerings. Those July auctions were strong across the board: the 3-year and 10-year both stopped through by 0.6bps, while the 30-year stopped through by 0.3bps. Notably, the 10- and 30-year auctions saw exceptionally strong indirect participation, suggesting robust foreign demand for US duration at the time.

Overall, higher outright yields than at the July auctions should provide a more attractive entry point for investors, particularly at the long end following the recent curve steepening. Treasury volatility is also broadly comparable with levels surrounding the previous strong round of supply. However, CPI represents the key near-term risk: the 3-year auction faces event risk from being held ahead of the release, while the 10- and 30-year auctions will have the benefit of greater clarity on the inflation outlook and Fed pricing. Geopolitical uncertainty surrounding Hormuz also remains a potential source of volatility, despite the recent reduction in US-Iran strikes.

3-year:

• Tail: (prev. -0.6bps, six-auction average 0.0bps)
• High Yield: (prev. 4.179%, six-auction average 3.888%)
• B/C: (prev. 2.60x, six-auction average 2.61x)
• Dealer: (prev. 7.7%, six-auction average 13.9%)
• Direct: (prev. 24.8%, six-auction average 21.7%)
• Indirect: (prev. 67.5%, six-auction average 64.3%)

10-year

• Tail: (prev. -0.6bps, six-auction average 0.3bps)
• High Yield: (prev. 4.580%, six-auction average 4.377%)
• B/C: (prev. 2.59x, six-auction average 2.47x)
• Dealer: (prev. 7.8%, six-auction average 11.0%)
• Direct: (prev. 10.7%, six-auction average 17.7%)
• Indirect: (prev. 81.5%, six-auction average 71.3%)

30-year

• Tail: (prev. -0.3bps, six-auction average -0.2bps)
• High Yield: (prev. 5.058%, six-auction average 4.937%)
• B/C: (prev. 2.44x, six-auction average 2.43x)
• Dealer: (prev. 10.1%, six-auction average 10.6%)
• Direct: (prev. 12.2%, six-auction average 22.5%)
• Indirect: (prev. 77.7%, six-auction average 67.0%)