The U.S. Treasury auctioned $58 billion of 3-year notes. These notes were sold at a high yield of 3.669%.
The WI level at the auction was 3.662%, with a tail of 0.7 basis points, slightly above the six-month average of 0.4 basis points. The bid-to-cover ratio stood at 2.53X, slightly below the six-month average of 2.59X.
Direct and Indirect Bid Participation
Direct bids were at 28.13%, up from the six-month average of 19.9%. Indirect bids were 54%, down from their six-month average of 65.5%. Dealers’ participation was higher at 17.9%, compared to the six-month average of 14.7%.
The 3-year note auction on August 5th came in weak, which is a concern for the market. Demand from foreign buyers was significantly lower than we’ve seen on average, forcing banks to pick up more of the slack than usual. This softness suggests that investors are becoming hesitant to buy U.S. debt at these levels.
This weak demand is happening as we see inflation proving stickier than anticipated, with the July CPI report from last week showing core inflation ticking up to 3.9%. This suggests the market is starting to price in the risk that the Federal Reserve will have to keep interest rates higher for longer than previously thought. The odds of another rate hike before year-end have now moved above 40%, up from just 25% a month ago.
For derivative traders, this points toward positioning for higher yields in the coming weeks. We could see value in shorting short-term interest rate futures, like those tied to the SOFR, or buying puts on Treasury note futures. These positions would benefit if bond prices fall and yields continue to rise.
Rising Market Volatility
Market nervousness is already becoming visible, with the MOVE index, a key measure of bond volatility, climbing to 115 from a low of 95 in early July. This environment suggests that options strategies that benefit from increased price swings could also be attractive. The weak auction result may be the signal that a period of low volatility is ending.
We saw a similar pattern back in late 2023, where a series of lackluster auctions preceded a sharp spike in yields across the curve. That period serves as a reminder of how quickly sentiment can shift when the market questions the level of demand for U.S. debt. Back then, the 10-year yield jumped nearly 50 basis points in a matter of weeks following similar auction data.
The results of the upcoming 10-year and 30-year auctions later this week will be critical to watch for confirmation of this trend. Furthermore, we will be closely monitoring any hawkish commentary from the Fed’s Jackson Hole symposium at the end of the month.
