US Treasury auction preview: 2y note auction will likely need some price concession - SocGen

The Treasury is scheduled to auction $26bn in 2y notes on 26 June, $34bn in 5y notes on 27 June, and $28bn in 7y notes on 28 June and the upcoming 2y note auction will likely need some price concession to be underwritten smoothly, according to the research team at Societe Generale.

Key Quotes

“The 2y note does not appear to have a clear set-up from a relative value perspective. Primary dealer positioning in the sector, with net longs near the highest level since June 2014, is another negative. However, the current 2y benchmark note’s yield is trading above the stop-out rate of the last auction, making the sector cheap on an outright level and an auction at current levels would take it higher than any stop-out rate since the October 2008 auction, which would be a positive. The auction may see an unscheduled reopening of an old 5y note (T 1.625% 6/19) if the high yield is in the range of 1.625% through and including 1.749%. Alternatively, the auction might see an unscheduled reopening of an old 7y note (T 1% 6/19) if the high yield is in the range of 1% through and including 1.124%.”

“We hold a slight negative bias on the upcoming 5y note auction, which will likely need some price concession to be underwritten smoothly. The current 5y note yield is well below the stop-out rates of the previous six 5y note auctions, making it rich on an outright basis. Other negatives include: the 5y note has tailed in four of the past six auctions and there is a lack of any clear set-up from the relative value perspective. A pick-up in demand in the last 5y note auction is a positive for the upcoming auction which might see an unscheduled reopening of an old 7y note (T 2.125% 6/22) if the high yield is in the range of 2.125% through and including 2.249%.”

“The upcoming 7y note auction will likely require some price concession due to the lack of a clear set-up from the relative value perspective and rich outright levels, with the 7y note yield below the stop-out rates of the previous seven 7y note auctions. The dealer positioning in the sector, which is highest since October, is another negative.”