$70 billion in 5-year notes auctioned at 3.983%, showing weaker international demand and average performance

    by VT Markets
    /
    Jul 28, 2025
    The U.S. Treasury recently sold $70 billion in 5-year notes, with a high yield of 3.983%. At the auction, the WI level was 3.975%, resulting in a tail of +0.8 basis points. This compares to a 6-month average of -0.3 basis points. The bid-to-cover ratio was 2.31x, which is lower than the 6-month average of 2.39x. Direct buyers made up 29.5%, exceeding the 6-month average of 18.9%, while indirect buyers accounted for 58.28%, which is below the 6-month average of 70.1%.

    Dealer Participation

    Dealers participated at a rate of 12.23%, just above their 6-month average of 11.0%. In last week’s 20-year note auction, international buyers matched the 6-month average, unlike recent trends. Domestic buyers have stepped in to balance the lower international participation, but this shift affects the overall demand and performance of the auctions. Based on the auction data from Michalowski, we expect interest rates to rise in the short term. The weak demand, indicated by the positive tail and low bid-to-cover ratio, shows that the market struggles to take on the amount of debt currently being issued. This suggests that bond prices may drop, requiring higher yields to attract buyers in future auctions. This trend isn’t just a one-time event. The U.S. Treasury’s auctions for $44 billion in 2-year notes and $28 billion in 7-year notes in late May 2024 also experienced weak demand, with both indicating that yields must increase to sell all the debt. This pattern across various maturities strengthens the notion that the market is becoming flooded with U.S. debt.

    Government Borrowing and Debt

    The main issue lies in the scale of government borrowing. The Congressional Budget Office predicts that federal debt held by the public will reach 99% of the nation’s GDP by the end of 2024 and continue rising. With such a vast supply, it’s reasonable to expect that investors will seek better compensation, leading to higher yields. As a result, we are positioning ourselves for rising interest rates in derivative markets. This strategy includes shorting 5-year and 10-year Treasury futures or buying put options on bond ETFs like IEF. The ongoing weak auction results strongly indicate that holding bearish bond positions is a sound choice in the coming weeks. Decreased interest from foreign buyers, as shown by the low indirect bids, also affects the U.S. dollar. Less foreign demand for our bonds means less demand for dollars to buy them. Historically, a decline in foreign interest in U.S. debt has preceded dollar weakness, making bets against the dollar an appealing secondary strategy. The current uncertainty suggests increased interest rate volatility as well. The CME FedWatch tool shows that markets are expecting the Federal Reserve to maintain its current stance, creating tension as weak economic data conflicts with ongoing inflation. In this environment, buying options that benefit from significant rate changes, like straddles on Treasury futures, is a wise strategy to guard against sudden market shifts. Create your live VT Markets account and start trading now.

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