ITC US 10y Note Auction Preview

US Auction:

9th October 2019

At 13:00ET/18:00BST, the US Treasury will auction $24bn re-opened 1.625% 10y Note Aug29

General Views: This week’s supply has been complicated by the looming US/China trade talks and the numerous headlines related to the negotiations. This backdrop may underpin demand for safe assets but makes set-up more difficult and may limit participation at the margin. Strong end-user demand likely required for a stop on or through the 1pm levels as it appears dealers will be playing for a sixth consecutive 10y tail.

-Most argue a further outright concession is warranted. The 1.50/1.51% zone has proven solid resistance with this week’s rallies all having stalled near that level.

-The WI is trading around 1.56% this morning, about 18bps through last month’s auction stop and the lowest yield heading into supply since Aug 2016

-The sector has cheapened up a bit on the curve. While 2s10s is about 3bps off the local highs(steeps), at 13bps currently, we are about 6bps steeper to where we traded heading into the Sept auction. Powell’s announcement of potential TBill purchases to add reserves served to steepen the curve and may cause end-users to focus efforts in shorter maturities. Above 16bps (last week’s highs), 2s10s could push out to 20bps with the June/July highs at 29bps the next level beyond that.

-There may be some appeal on the fly however as some view 5s10s30s fly cheap relative outright yield levels. That fly is trending has been trending cheaper since late August when it bottomed near -40bps vs current levels above -32bps.

-On asset swap, 10y HL spreads have been pushing wider since the Fed implemented a series of O/N and term repo operations following the mid-Sept funding shock. 10y spread widened from multi-yr lows near -13bps to local highs this week at -7.5bps. We have since retraced a bit to -9bps amid receiving flows associated with looming supply (Italy deal).

-Foreign demand is a concern as relative appeal of USTs has diminished as US has outperformed overseas peers recently.

US German 10y spread has narrowed to ~211bps, the tightest since Feb 2018. EUR/USD FX hedging cost remain prohibitive (-265bps for 3m), more than off-setting this +211bps of yield pickup which may have been a factor as foreign demand declined to the lowest since Aug 2017 at the Sept Auction.

US/German 10y spread:

-Recent performance has been rather lackluster. Following strong auctions in March/April which stopped 0.8 & 0.9bps through respectively, the last five 10y auctions have come with tails. Non-dealer demand has held up okay, averaging 72.5% over the last 5 auctions which is just below the 74.1% avg for 2018.
The Sept auction tailed despite a healthy 75.3% non-dealer take-down. This was fueled by the highest take-down on record by investment managers where demand increased 8.8ppts to 64%. Foreign take-down declined 2.9ppts to 9.1%.

Overall, an outright concession is likely warranted. End-user demand could dictate outcome and generally positive news on the US/China trade front may limit participation at the margin. Desks will be looking to play for a small tail.

Recent avgs: Bid/cover 2.39x; Dealers 25.7%; Directs 13.2%; Indirects 61.2%

Prior Results (9/11th ) A bit soft with a ~0.5bp tail but end-user demand was solid amid an above avg indirect bit: Indirects took down 62.60% vs. last four avg. 58.90% while directs were allotted 12.70% vs. last four avg. 12.90%bid/cover was a healthy 2.46x

10s were trading in the middle of the day’s range heading in and the market is little changed on the mixed overall result. Belly continues to under-perform as 2s10s holds near session highs at 6.75bps.