Summary:
- This week’s two- and five-year auctions are likely to draw solid demand. Despite their record auction sizes, these tenors offer a compelling risk-reward profile amidst an evolving macroeconomic landscape.
- The elevated duration and low yield of the seven-year notes make their auction vulnerable to weak bidding metrics. While extending duration might be appealing due to increasing disinflationary pressures and a slowing economy, uncertainty regarding the U.S. election and potential economic reacceleration keeps duration buyers cautious.
- Economic data to test market appetite for duration. The auctions precede the second readings of US GDP and PCE data. The 5- and 7-year tenors are particularly sensitive to shifting market sentiment. If investors believe the Fed’s fight against inflation is not over, yields in the belly of the yield curve might rise faster than other tenors. On the other hand, accelerated disinflationary…
