Fixed income market quiet ahead of today’s five-year auction

Today we get the second in a trilogy of Treasury auctions this week. It’s a $70 billion sales of five-year year notes due at the top of the hour.

Yesterday the market was anxious about a two-year sale but it went surprisingly well and there was a big follow-through of bids afterwards. That led to broad USD selling and a bump in risk appetite.

The stakes appear to be lower today with the whole curve trading flat after an earlier decline in yields. Again though, the market will be tested with cash trading at 3.66%, or nearly 50 bps below the July auction level of 4.121%.

“One could argue the magnitude of the recent rally
necessitates a bit of a concession this afternoon,” writes BMO ahead of the sale. “Although the repricing to a
lower yield plateau certainly hasn’t been without fundamental backing, and is
consistent with the cyclical shift the market has long anticipated.”

They suggest a bias for a tail and highlight that only two auctions of 5s have stopped through this year while five have tailed by an average of 1.1 bps.

This article was written by Adam Button at www.forexlive.com.