Treasuries Fall After Soft Demand for First of Week's Auctions

  • Month’s first coupon auction cycle challenged by Fed outlook
  • Heavy corporate issuance slate weighs for second day

Treasuries fell Tuesday led by the three-year sector after the government’s monthly auction of the maturity drew a higher-than-expected yield.

The three-year yield was higher by 2.2 basis points at about 1.604 percent as of 2:50 p.m. in New York. It traded at the highest level since December last week, 1.62 percent, as the market-implied odds of a rate hike at next week’s Federal Open Market Committee meeting approached certainty. The auction of $24b of new three-year notes was awarded at 1.630%, about half a basis point higher than where it was quoted in when-issued trading at the 1 p.m. auction deadline and the highest three-year auction yield since April 2010.

  • Auction was only the second three-year sale of the past eight to tail; despite outright yield and concession on day, it faced risk that FOMC will revise up its estimate for how much the fed funds target will rise in coming years; Morgan Stanley this week recommended a short position in 5Y for that reason
  • 2.74 bid-to-cover ratio was below average for previous six, and primary dealer award was higher than previous as the combined award to direct and indirect bidders declined
  • Auction cycle continues with $20b 10Y reopening Wednesday, concludes with $12b 30Y on Thursday
  • IG credit supply also weighed on USTs; 12 issuers lined up to sell an estimated $16b, led by Siemens $benchmark with 10Y and 30Y tranches; Treasuries fell Monday as $22.7b was priced by 11 names
  • 30Y yield rose as much as 1.7bp to 3.122%, testing YTD highs near 3.13%, which held on two previous occasions in January
  • JPMorgan Treasury Client Survey for week ended Monday shows investors see buying opportunities in higher yields; longs increased and shorts declined among all clients and active clients, leaving both categories net long
  • Front-end flows skewed to buying, including in white eurodollars (2017 expiries) and in call options on Dec18 eurodollars
  • UST yields widened vs German yields, which declined led by short end as SNB data showed a jump in FX reserves; the U.S.-German 2Y spread approached 220bp, widest since January 2000

— With assistance by Edward Bolingbroke

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