The US treasury will auction $13B of 20-year bonds at 1 PM ET. The last auction of the issue was sold at a high yield of 4.68% The current yield is just below that level at 4.653% ahead of the auction.
BMO has outlined the Pros and Cons heading into the auction:
Pros
- 20s have sold off nearly 30 bp since the release
of the November payrolls report on December 6th. The sharp backup in
rates on limited, new fundamental information may translate to a
stronger dip-buying bias. - December is a seasonally positive month for
20-year supply. Since the newest bond’s introduction in 2020, three
of the four auctions stopped-through. - The unemployment rate is once again on the
upswing and 0.8 pp off the cycle low. Moreover, November’s core-PCE
move is tracking at +0.1% MoM (albeit a high +0.1%) in a trend sure
to be welcomed by the FOMC. - The strength of the September/October data has
faded, and the cooling trend seen over the summer months has largely
resumed in November.
Cons
- The last three consecutive 20-year auctions
tailed, and by an average of 2.2 bp. - November’s 20-year refunding auction drew very
weak demand and tailed by an impressive 3.1 bp – the second largest
on-record behind the 3.3 bp tail in February 2024. Further,
non-dealers took just 77.4% of the issue, the smallest end-user
allocation at a refunding auction in more than three years. - The event risk posed by tomorrow’s FOMC events
may keep a meaningful contingent of otherwise would-be buyers on the
sidelines. - The 10s/20s/30s cash butterfly is trading at some
of its richest levels since the beginning of the summer which
detracts from the relative value case for 20s compared to the wings.
Below are the 6-month averages for the major components. The auction result will be compared to the averages to determine relative strength or weakness of the auction.
- Tail: 6-month average 0.6bps
- Bid-to-Cover: 6-month average 2.57x
- Dealers: 6-month average 13.3%
- Directs ( a measure of domestic demand): 6-month average 15.3%
- Indirects (a measure of international demand): 6-month average 71.4%
This article was written by Greg Michalowski at www.forexlive.com.
