Treasury Auctions 2-year Notes at 4.823%, Part of $120 Billion Fresh Bond Supply This Week

U.S. Treasuries trade found a bid overnight with all tenors slim gains after the $42 billion 2-yr note sale met solid demand. The sale drew a high yield of 4.823%, which tailed the when-issued yield by 0.3 bps, while the bid-to-cover ratio (2.78x) and indirect takedown (65.4%) were comfortably above average but lower than last month’s excellent auction. The desk gave a C+ rating on the auction. This week brings some new supply. There is today’s $42 billion, 2-yr note auction, a $43 billion, 5-yr note offering tomorrow, and a $35 billion 7-yr note auction on Wednesday.

The CME FedWatch Tool shows a 98.9% probability of a 25-basis points rate hike on Wednesday, but what comes after is the real question. The fed funds futures market still thinks the July hike will be the last one by the Fed. However, The Wall Street Journal’s Nick Timiraos wrote this morning that suggested the Fed isn’t ready to declare victory on inflation.

Today’s $42 bln bid-to-cover ratio (2.78x) and indirect takedown (65.4%) were above average.  The desk gave an C+ rating on the auction.

  • The domestic demand was below its six-month average indicative of softer domestic demand
  • International demand (indirect) was above the six-month average
  • Primary dealers were left with18.93 % versus normal around 19.7%

Auction Highlights

  • Duration: 2 Years
  • Amount:  $42 billion
  • High-yield 4.823%
  • WI level at the time of the auction 4.820%
  • Tail 0.3 basis points
  • Bid to cover 2.78X versus 12-month average of 2.663X
  • Directs 18.2% versus 12-month average of 20.7%
  • Indirects 65.4% versus 12-month average of 60.2%
  • Dealers 16.4% versus 12-month average of 19.1%

Auction grade: C+

Yields after the auction.

  • 2-yr: -1 bp to 4.74%
  • 3-yr: -3 bps to 4.30%
  • 5-yr: -3 bps to 3.96%
  • 10-yr: -2 bps to 3.72%
  • 30-yr: UNCH at 3.82%

Yields Before the Auction.

  • 2-yr: -2 bps to 4.83%
  • 3-yr: -4 bps to 4.41%
  • 5-yr: -4 bps to 4.06%
  • 10-yr: -3 bps to 3.82%
  • 30-yr: -1 bp to 3.90%

Prior auction results:

  • High yield: 4.670%
  • Bid-to-cover: 2.86
  • Indirect bid: 68.5%
  • Direct bid: 18.2%

Average results of previous 12 auctions:

  • High yield: 4.138%
  • Bid-to-cover: 2.66
  • Indirect bid: 60.2%
  • Direct bid: 20.7%
Bond Traders Weekly Outlook: Specters of New Supply, FOMC and PCE Ahead

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