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