The U.S. Treasury has announced its auction schedule for the upcoming week. It will sell $69 billion in 2-year notes, $70 billion in 5-year notes, and $44 billion in 7-year notes. The auctions will take place early in the week. The 2-year and 5-year notes will be auctioned on Monday, while the 7-year notes will be auctioned on Tuesday. This schedule allows the auctions to happen before the Federal Open Market Committee’s rate decision on Wednesday afternoon.

Current Market Conditions

Yields in the U.S. debt market are rising. The yield for 2-year notes is now 3.926%, which is up by 4.3 basis points. The yield for 5-year notes is at 3.981%, an increase of 4.6 basis points. For 10-year notes, the yield is 4.419%, up by 3.2 basis points, and the 30-year notes have a yield of 4.961%, which is up by 1.3 basis points. The upcoming issuance of $183 billion in new government debt is a critical test for the market, especially right before the rate decision. The large supply may struggle to attract buyers without raising the yields as an incentive. This indicates a likely decrease in bond prices and an increase in yields.

Focus on Shorter-Term Debt

The pressure will likely be highest on shorter-term debt, where the largest auctions are taking place. Therefore, we should focus on strategies related to 2-year and 5-year rates. This is in response to the market handling $139 billion in shorter-term debt in just one day. This pressure is heightened by ongoing inflation. The latest Consumer Price Index shows an annual rate of 3.5%, which is significantly above the central bank’s target. As a result, market expectations have shifted, with the CME FedWatch Tool now suggesting only one or two rate cuts for the entire year. This makes it difficult for the market to absorb new debt at current yields. With the combination of heavy supply and uncertainty around policy, we expect to see more interest rate volatility. The MOVE Index, which measures Treasury market volatility, has increased to near 100 from the low 80s just a month ago, indicating rising investor concerns. We anticipate this trend will continue through next week’s events. Traders might consider protecting themselves against rising yields by buying put options on Treasury note futures. Another approach is to buy volatility directly using strategies like straddles on futures contracts. This would allow traders to profit from significant price swings regardless of direction after the auctions and policy announcements. This method offers protection against event risk without speculating on an exact outcome. Historically, times of heavy Treasury issuance before major economic news have resulted in weaker auction performance, including lower bid-to-cover ratios. For example, a notably weak 30-year bond auction in late 2023 caused a sharp but temporary spike in long-term yields. We should be ready for a similar market reaction if demand for next week’s notes is disappointing. Create your live VT Markets account and start trading now.

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