The U.S. Treasury sold $58 billion worth of 3-year notes. These notes had a high yield of 3.669%. The market indicator (WI) for the auction was 3.662%, resulting in a tail of 0.7 basis points. This is slightly higher than the six-month average of 0.4 basis points. The bid-to-cover ratio was 2.53X, a bit lower than the six-month average of 2.59X.

Direct and Indirect Bid Participation

Direct bids accounted for 28.13%, up from a six-month average of 19.9%. Indirect bids were at 54%, down from their six-month average of 65.5%. Dealer participation rose to 17.9%, compared to the average of 14.7% over six months. The 3-year note auction on August 5th showed weakness, raising concerns in the market. Demand from foreign buyers dropped significantly, leading banks to absorb more of the selling than usual. This decline suggests that investors are becoming less willing to buy U.S. debt at current rates. This drop in demand comes as inflation proves more persistent than expected. The July CPI report revealed core inflation rose to 3.9%. This implies that the market is starting to factor in the risk of the Federal Reserve needing to keep interest rates elevated longer than anticipated. The chances of another rate hike before the year ends have increased to over 40%, up from 25% a month ago. For traders in derivatives, this indicates a strategy shift towards higher yields in the coming weeks. There may be value in shorting short-term interest rate futures, like those linked to SOFR, or purchasing puts on Treasury note futures. These strategies could profit if bond prices decline and yields rise.

Rising Market Volatility

Market anxiety is evident, with the MOVE index—an important gauge of bond volatility—increasing to 115 from a low of 95 in early July. This environment suggests that options strategies benefiting from increased price fluctuations may also become appealing. The weak auction results could indicate the end of a period of low volatility. A similar trend occurred in late 2023, when a series of disappointing auctions preceded a sharp rise in yields. This history shows how quickly sentiment can change when the market questions the demand for U.S. debt. At that time, the 10-year yield spiked nearly 50 basis points within weeks after similar auction outcomes. The upcoming 10-year and 30-year auctions later this week are crucial to observe for confirmation of this trend. Additionally, we will be paying close attention to any hawkish remarks from the Fed’s Jackson Hole symposium at the month’s end. Create your live VT Markets account and start trading now.

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