US three-year note auction points to more turbulence ahead

US three-year note auction points to more turbulence ahead

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Yesterday's 3-year note auction showed weakness in foreign demand, which can be explosive during today's 10-year US Treasury bond sale. If the Consumer Price Index surprises even marginally, there is the possibility to head towards brutal 10- and 30-year auctions, which may push 10-year yields on a fast track to 2%.


Today's 10-year bond auction will be critical to understanding whether US Treasuries' foreign demand increases amid a rise in yields.

David Tepper, the founder of Appaloosa Management, said that the selloff in Treasuries is likely over because foreign investors will start to buy Treasuries at current yield levels. Nevertheless, yesterday's sale of 3-year Treasury notes proved quite the contrary.

Information concerning foreign demand of US government bonds is contained within indirect bidders' data, which in the past few Treasury auctions showed is in decline. News outlets reported that yesterday's 3-year note auction was solid, highlighting that the bid-to-cover ratio was the highest since June 2018. However, when looking at the composition of that demand, the snapshot is troubling. Indeed, while bidding metrics as a whole point to higher demand, indirect award declined to 47.8%. It means that foreign entities are still not buying into US Treasuries despite higher yields.

Source: Bloomberg.

The sale of 7-year notes on February 25th showed how lack of foreign demand poses a serious threat to US Treasuries. During this auction, indirect bids fell to the lowest since 2014, provoking the yield on 7-year notes to tail by 4.1 basis points, provoking a wider selloff of Treasuries. Despite indirect bidder demand did not plunge as much during yesterday’s 3-year note auction, we believe that it still exhibits bidding metrics weakness which could prove explosive today and tomorrow during the 10- and 30-year bond auctions, especially if the Consumer Price Index comes stronger than expected today.

Source: Bloomberg.

Economists expect the yearly CPI figure to rise to 1.7% from 1.4% prior, but if inflation surprises even marginally, the bond market's reaction can be brutal.

As highlighted before, 10-year Treasury yields are now trading within a consolidation area between 1.50% and 1.65%. If yields were to break above 1.65%, we might witness another squeeze within the Mortgage-Backed Security (MBS) market that could send the 10-year yields to a fast track towards 2%.

Source: Bloomberg.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

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. Android is a trademark of Google Inc.

©   since 1992