Weak bidding metrics and rising yields might lead to a disastrous 7-year US Treasury note auction
Senior Fixed Income Strategist, Saxo Bank Group
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.
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)