US 3-Year Note Auction Preview June 11th


This afternoon the US Treasury will issue the first of this week’s lines of debt when it auctions $32bln in 3-year notes. This will be the first of three sales totaling $66bln in supply alongside an estimated $36.2bln in coupon securities maturing.

Bond markets have seen the bears very much in control over the past few weeks. Many bond traders now believe we may be at the start of a major correction to the 31-year bond rally.

US 10- and 30-year yields have risen to 14-month highs over the past week – chartists predicting further losses could come, as the talk of imminent Fed tapering escalates.

There was general disappointment with the Bank of Japan this morning, following the decision to leave stimulus measures ‘as was’, which kept JGBs on the back-foot.

Investors were also wary of adding to their exposure of higher-yielding bonds as Germany’s Constitutional Court began its two-day hearing on the legality of the European Central Bank’s bond-buying scheme (OMT).

It’s worth noting that last week Denver-based Lipper highlighted wariness of bond holders. It revealed that investors pulled $9.1 billion from fixed-income mutual funds and exchange-traded funds in the week ended June 5. This apparently represents the second-biggest redemption for a week since the company started tracking the data in 1992.

PIMCO, the world’s largest mutual fund, declined 1.9% in May, the biggest monthly loss since September 2008.


At the last auction in May, the US sold $32bln 3-year notes at a high yield of 0.354%; the bid-to-cover was 3.38. Indirect bidders took 30.7% of the sale, directs took 14.6%, which left dealers with 54.7%. Six auction averages are as follows: bid-to-cover 3.45; indirect 22.05%; direct 23%.

History-wise we have witnessed better foreign buying of late, highlighted at last month’s May auction, helping the solid indirect bid.

Last week the Japan’s public pension fund, the world’s largest with a pool of $1.1 trillion, announced on May 31 the most significant shift in its asset allocation since 2006. GPIF said it would increase its weighting in foreign stocks to 12% from 9% and lift its allocation of foreign bonds to 11% from 8%.

“Foreign accounts [generally] appear to be on a slowly improving trend from low levels and tend to be more highly correlated with yields,” says 4Cast. “However, funds were lower in May and have toned down demand more recently,” the analytics firm went on to say.

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