The Treasury Department kicks off its latest auction series on Tuesday with the sale of a 3-year note, which is expected to offer investors the highest yield since February 2025.
The Treasury on Wednesday said it's going to keep the amount of longer term notes and bonds issued unchanged for now. That means investors can expect $58 billion in 3-year notes on Tuesday, $42 billion of 10-year debt on Wednesday, and $25 billion in 30-year debt on Thursday. Markets will closely track the demand for the new series amid a fresh round of pressure on crude prices and shifting interest rate bets.
For Tuesday's auction, the scoreboard looks like this: The 3-year yield is trading at 4.3%, which is 0.12 percentage points more than the 4.179% in yield awarded in July's auction. If it gets absorbed at current levels, it will be the highest yield investors get for a 3-year note since the Feb. 11, 2025, auction.
In the July auction, end-user demand was the highest on record thanks to solid participation by foreign and domestic investors, says J.P. Morgan's strategist Jay Barry. Investment managers bought 78.8% of the 3-year supply, the highest share recorded for this group.
Things might look different this time around.
Even though yields have gone higher, investors could wait for the release of inflation data.
On Wednesday, investors will get a look at July inflation data, while August data comes out on Sep. 11. Both reports come before the Federal Open Market Committee meeting on Sept. 15-16. Elevated inflation means the Fed could lean toward a hike this year, which can raise yields on the 3-year note.
Cleveland Federal Reserve president Beth Hammack on Monday told Yahoo Finance that she supports "some number" of rate hikes to bring inflation to the 2% target.
Hopes of a deal with Iran have also faded as the negotiations between the U.S. and Iran have broken down. The front-month WTI crude oil contract neared $85/bbl during the overnight session, turning oil into a source of inflationary angst.
The "obvious takeaway is that the impact on the energy sector isn't going to be resolved anytime soon," Ian Lyngen, strategist at BMO Capital Markets, wrote on Tuesday.
When inflation fears rise, buyers pull back, leading to weak Treasury auction metrics.
"The geopolitical backdrop remains relevant as any headline-driven market volatility may complicate the setup for the new 3-year supply. With a full 25 bp rate hike still priced in by year-end, we'll be interested to see the demand for front end-supply at the current juncture," wrote Lyngen.
Given "a less supportive broader macro backdrop," Barry from J.P. Morgan thinks the auction will see softer demand.
While the 10- and 30-year auctions come with their own unique set of considerations, inflation is a common denominator. The weak jobs report last week hasn't altered the scenario embedded in the yield, leaving prospects of higher inflation as a key reason why investors may not want to buy into auctions this week.
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