The US Treasury recently sold $44 billion of 7-year notes, with a high yield of 3.925%, just above the WI level of 3.922% ahead of the auction. The auction resulted in a positive tail of 0.3 basis points compared to a 6-month average of -0.9 basis points, indicating less favourable demand than usual.
The bid-to-cover ratio was 2.49 times, slightly below the 6-month average of 2.62 times. Direct buyers accounted for 12.8% of the notes, under the 6-month average of 24.3%, while indirect buyers, primarily international, made up 77.45%, above the average of 66.2%. Dealer participation stood at 9.8%, close to the average of 9.5%.
Underwhelming Auction Results
Despite strong international interest, the auction was deemed underwhelming overall.
Today’s 7-year auction showed some clear stress, as the bond sold at a higher yield than the market was anticipating just moments before. The positive tail tells us the Treasury had to pay up to get the deal done, signaling that domestic investors are demanding more compensation. This suggests the path of least resistance for yields is now higher.
This weak demand fits into the broader economic picture we have been seeing. With the latest July 2025 CPI report still showing stubborn inflation at 3.1%, the Federal Reserve has very little reason to hint at rate cuts. The market is increasingly accepting the “higher for longer” narrative, especially given the hawkish sentiment from last week’s Jackson Hole symposium.
Bearish Stance on Treasury Prices
For us, this reinforces a bearish stance on Treasury prices, meaning we anticipate yields will continue to climb in the coming weeks. We should look at adding to positions that benefit from rising rates, such as shorting 10-year Treasury note futures (ZN) or buying put options on bond ETFs. These strategies will become profitable if bond prices keep falling as we expect.
The poor showing from domestic buyers is a significant warning sign, something we haven’t seen this consistently since the supply concerns back in late 2023. With recent data showing the U.S. labor market remains tight, adding another 210,000 jobs last month, pressure on yields from both Fed policy and debt supply is building. While foreign demand saved this auction, we cannot rely on that to absorb the heavy issuance schedule planned for the rest of the year.
