The US treasury will auction off $58B of 3-year notes at the top of the hour. The auction is the first of three this week. The treasury will auction 10 year notes (well 9 year and 11 month) tomorrow and 30 year bonds on Thursday.
After trading above 4.20% for most of November, yields have drifted down to around 4.10%, creating a reasonable concession ahead of key events this week.
With CPI and PPI expected to support a likely FOMC rate cut next week, the fundamental backdrop appears favorable for 3-year notes. However, their outperformance relative to longer-dated securities in December has reduced their relative value appeal. Despite this, the fundamentals still suggest solid value for 3-year notes, with potential for a small stop-through in the afternoon auction.
BMO outlines some pros and cons:
Pros
The
trio of stop-throughs at the late-November 2-, 5-, and 7-year auctions
showed solid demand for shorter-dated coupons at prevailing valuations.The
details of Friday’s employment report showed thorough evidence of
softening in the employment landscape.The
drift toward lower realized volatility in Treasuries remains thematic with
the MOVE Index down to some of its lowest levels since the beginning of
the Fed’s tightening cycle.As
the major global central banks continue to march toward a more normal
policy rate environment, it follows intuitively that the broader global
rates complex should be on its way lower.December
is seasonally fair for 3-year auctions; since 2010, eight auctions
stopped-through, one stopped on the screws, and five tailed.
Cons
The
event risk posed by tomorrow’s CPI update may keep aggressive bidding at
bay until there is greater clarity on the inflation outlook.The
last two 3-year auctions tailed – November’s by 0.9 bp and October’s by
0.8 bp – with solidly below-average non-dealer participation.
The 6 month averages of the major components shows:
Bid to cover: 2.56XTail: 0.0 bpsDirects (domestic buyers): 17.1%Indirect (international buyers): 66.4%Dealers: 16.6%
This article was written by Greg Michalowski at www.forexlive.com.
