The US Treasury recently sold $44 billion in 7-year notes, with a high yield of 3.925%. This yield was slightly above the When Issued (WI) level of 3.922% before the auction. The auction, however, showed a positive tail of 0.3 basis points, which is a contrast to the 6-month average of -0.9 basis points. This means demand was weaker than usual. The bid-to-cover ratio was 2.49, which is a bit lower than the 6-month average of 2.62. Direct buyers took 12.8% of the notes, down from the 6-month average of 24.3%. On the other hand, indirect buyers, mostly international investors, made up 77.45%, which is higher than the average of 66.2%. Dealer participation was at 9.8%, close to the average of 9.5%.

Underwhelming Auction Results

Even with strong international interest, the auction results were disappointing overall. Today’s 7-year auction indicated stress, as the bond sold at a higher yield than expected just moments before. The positive tail means the Treasury had to offer a higher yield to attract buyers, signaling that domestic investors want more compensation. This suggests that yields are likely to continue rising. This weak demand aligns with broader economic trends. The latest CPI report for July 2025 shows inflation stubbornly at 3.1%, leaving the Federal Reserve with little reason to suggest rate cuts. The market is increasingly accepting the “higher for longer” outlook, especially after the hawkish sentiments expressed at last week’s Jackson Hole symposium.

Bearish Stance on Treasury Prices

Given these developments, we hold a bearish outlook on Treasury prices, expecting yields to rise in the coming weeks. We suggest adding positions that benefit from increasing rates, like shorting 10-year Treasury note futures (ZN) or buying put options on bond ETFs. These strategies will be profitable if bond prices continue to fall, as we anticipate. The weak demand from domestic buyers is a concerning sign, something we haven’t observed this consistently since late 2023’s supply issues. Recent data shows the U.S. labor market remains tight, with 210,000 new jobs added last month, increasing pressure on yields from both Fed policies and debt supply. While foreign demand helped this auction, we cannot depend on it to manage the heavy issuance planned for the rest of the year. Create your live VT Markets account and start trading now.

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