Insights 
VT 
The US Treasury is set to auction $39 billion of 10-year notes at 1 PM ET, marking the second of three auctions this week. In the previous auction, 3-year notes received strong demand, mainly from international buyers.
Key metrics for comparison with six-month averages include a tail of -0.8 basis points, a bid-to-cover ratio of 2.56X, domestic buyers making up 17.4%, international buyers 71.1%, and dealers 11.4%.
Current Yield Overview
Currently, yields for various US Treasuries are low, with the 10-year yield at 4.0492%, down 2.5 basis points. The 2-year yield is 3.531%, a decline of 1.1 basis points, while the 30-year yield stands at 4.697%, down 2.0 basis points.
The 10-year yield, a key benchmark for consumer borrowing costs, has dropped about 30 basis points since peaking at 4.347% in August. Consequently, the 30-year mortgage rate has seen a sharper decline from 7.0% to 6.49%, a decrease of 51 basis points.
While the 10-year yield has fallen 76 basis points from its peak earlier this year, the cumulative drop in mortgage rates for 2025 still trails by approximately 15 basis points.
Today’s 10-year note auction at 1 PM is the most important event of the day for setting the direction of interest rates. We saw strong international demand in yesterday’s 3-year sale, and if that continues, it could push the 10-year yield decisively below the 4.00% level. This follows last week’s slightly softer inflation report, where the August Consumer Price Index (CPI) showed core inflation moderating to 2.8%, encouraging bets on lower rates.
Impact on Yield Curve and Market Volatility
The focus should be on how the auction impacts the yield curve, specifically the spread between the 2-year and 10-year yields, which currently sits at a healthy 52 basis points. A strong auction result could flatten this curve as traders anticipate the Federal Reserve may be closer to easing policy in early 2026. We’ve seen the Fed on hold for the past nine months, and futures markets are now pricing in a 60% chance of a rate cut by March 2026.
We are also watching the spread between mortgage rates and Treasury yields, which has been wide for most of 2025. Although this spread has narrowed by about 15 basis points since mid-August, it remains wider than the historical average from the 2015-2019 period. This suggests there is still room for mortgage-backed securities to outperform Treasuries, a relative value trade that continues to look attractive.
Given the uncertainty around the auction’s outcome, volatility in the bond market could increase. The MOVE Index, which measures Treasury market volatility, has fallen from its highs earlier in the year but remains elevated around 110, well above its pre-2022 average. This makes options on Treasury futures a useful tool for positioning for a larger-than-expected move in yields in either direction over the coming weeks.
