At 1 PM ET, the US treasury will auction $70 billion 5-year Treasury note auction.
The primary demand for 5-year notes has been weaker this year, with 70% of auctions tailing by an average of 1.0 bp. According to BMO, the auction is expected to clear at the highest yield in five months (~4.20%), which may attract reasonable demand.
A negative, however, could be the volatility from Trump’s tariff threats could offset interest in Treasuries and might solicit a concession to the auction.
Pros:
- Yesterday's 2-year auction showed strong demand, with 90.8% taken by non-dealers.
- 5-year notes appear cheap on relative value metrics
- Investors expect the Fed to maintain its path toward neutral rates, even with pauses between meetings..
Cons:
- Historical performance of November 5-year auctions is weak, with two-thirds tailing since 2015.
- Only 4 out of 14 auctions during Fed rate-cutting cycles since 2007 stopped-through.
- October’s 5-year auction saw significant tailing (1.6 bp) and the lowest end-user allocation in six months.
- Tariff risks and high yields may deter demand, given uncertainties in the economic trajectory.
The 6 month averages of the major components shows:
- Bid to cover: 2.37X
- Tail: 0.7 bps
- Directs (domestic buyers) 16.0%
- Indirects (international buyers) 69.7%
- Dealers 14.3%
