Weak bidding metrics and rising yields might lead to a disastrous 7-year US Treasury note auction

Weak bidding metrics and rising yields might lead to a disastrous 7-year US Treasury note auction

Bonds
Althea Spinozzi

Senior Fixed Income Strategist

Summary:  Everything points to a brutal 7-year auction, which may provoke a deeper selloff in the secondary bond market. Bidding metrics are quickly deteriorating, and yields are rising fast as investors position for earlier rate hikes. If today's 7-year auction tails a lot, it's safe to assume that the secondary bond market will come under fire, too.


The recent fast rise in yields is draining demand for US Treasuries putting the bond market at risk of another selloff.

Yesterday, the US Treasury sold 2-year and 5-year notes showing a strong deterioration in bidding metrics which might lead to a disastrous 7-year note auction today.

Demand for the 2-year Notes was particularly weak, with the bid-to-cover ratio falling to 2.28x, the lowest level since December 2008, during the Lehman bankruptcy. Indirect bidders plunged to 45.32% from 60.53% in the prior auction causing the yield to tail by 0.08bps pricing at 0.31%, the highest yield since March 2020.

Despite weakness from the 2-year note sale didn’t leak to the following 5-year auction, it’s safe to say that there are signs that demand for US Treasuries is deteriorating. Although the bid-to-cover ratio for the 5-year notes was in line with the year-to-date average, indirect bidders fell from 62.7% in the previous auction to 54.3%, the lowest since March 2020.

Today the selloff continues with 10-year yields trading well above 1.5%. The belly of the curve is rising in a bearish construction, indicating that the market is beginning to position for earlier rate hikes as inflationary pressures increasingly look more permanent. Indeed, the Eurodollar strip is close to showing a rate hike as early as June 2022, and it is already pricing two rate hikes by the end of 2022.

It looks like the perfect explosive mix ahead of a bond auction, which maturity usually is not liked by the market. In February, we witnessed the most brutal 7-year auction in years as the yield curve was selling off on inflation fears (does it ring a bell?). Suppose today's 7-year auction tails a lot. In that case, it's safe to assume that the secondary bond market will come under fire, too, forcing yields even higher.

Source: Bloomberg and Saxo Group.
Source: Bloomberg and Saxo Group.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.