The U.S. Treasury is set to auction off $69 billion in 2-year notes. This timing is unusual since the Treasury usually avoids such auctions on days when the Federal Reserve announces its rate decisions, which is coming up this Wednesday. To manage this, the Treasury will also hold a 5-year note auction today at 1:00 PM ET. In the past, 2-year notes have shown a tail of -0.3 basis points and a bid-to-cover ratio of 2.59 times.

Market Participation Analysis

Direct buyers, or those from the U.S., make up 20.8% of the demand. Indirect buyers, mainly from overseas, represent a larger 67.7%. Dealers fill in the remaining 11.4% of buyers in these auctions. Because of the unusual timing before the Federal Reserve’s decision, this auction is a key moment to gauge market sentiment. Traders should look at the results as early indicators of how investors feel about future interest rate changes. The auction’s results will show how well the market can handle a large amount of government debt amid uncertainty about policy. Past auction data suggests strong demand, but the latest sale of $69 billion in 2-year notes on May 28 showed otherwise. That auction resulted in a high yield of 4.917%, indicating weaker demand compared to the previous six sales, with a lower bid-to-cover ratio of 2.41. We are monitoring whether this trend continues, as it may indicate growing nervousness among buyers. This caution is justified since the market expects officials to keep rates steady. The CME FedWatch tool indicates a greater than 99% chance of no change. The focus is now on the Fed’s updated economic outlook and any shifts regarding future rate cuts. A poor auction outcome could heighten concerns that rates may remain elevated longer than expected.

Key Metrics to Monitor

The most crucial metric to watch is the percentage taken by indirect bidders, representing foreign demand. While this group’s six-month average is a strong 67.7%, a significant dip below that would signal bearish trends for bonds and suggest that international buyers are reluctant to hold U.S. debt at current yields. Historically, times of policy uncertainty increase volatility in interest rate markets. Derivative traders might want to consider using options to protect against sharp yield movements after the Fed’s announcement. The cautious tone from Powell, despite the Consumer Price Index for May showing inflation easing to 3.3%, supports preparing for potential surprises. Create your live VT Markets account and start trading now.

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