2Y Treasury Auction Yields Lowest Rate in Two Years

Auction Results Calm Market Nerves

Following a dramatic drop in yields to a new low in August 2024, traders were anxiously watching the 2Y auction to see if the increase in yields would cause market discomfort. However, their fears were unfounded as the Treasury sold $69BN in paper due to strong market demand. The auction stopped at a high yield of 3.874%, the lowest since August 2022, and a significant decrease from the 4.434% last month. This 56bps drop was the largest since the December recession scare, which was the biggest since the March 2023 bank crisis. Historically, a 50bps+ drop in sequential 2Y bond yields has led to significant recession fears. The last two such scares turned out to be false alarms, and it remains to be seen if this latest one will follow the same pattern.

Comparison with Previous Auctions

The auction also stopped through the 3.800% When Issued by 0.6bps, which was satisfactory but not as impressive as last month's 2.3bps stop through, the largest in the past decade. The bid to cover ratio dropped to 2.68 from last month's impressive 2.81, but it was still one of the highest in the past year, and well above the six-auction average of 2.62.

Internal Auction Results

The internal results were average, with Indirects awarded 69.0%, down from 76.6% but above the recent average of 66.2%. Directs took down 19.1%, the most since June, leaving Dealers with 11.9%, up from the record low 9.0% last month but above the recent average of 13.7%.

Impact on 10Y Yields and Future Predictions

Overall, this was a solid if not exceptional 2Y auction, which helped push 10Y yields lower, toward 3.83% after they had risen as high as 3.86% earlier in the session. However, with the Federal Reserve now expected to cut rates by 25bps regardless, the real catalyst will be the August payrolls report next week. Additionally, tomorrow's NVDA earnings may also affect the direction of the US rates complex.

Bottom Line

This recent 2Y Treasury auction has yielded the lowest rate in two years, providing a sense of relief to the market. Despite the drop in yields, the auction saw strong demand and was overall solid. However, with the Federal Reserve set to cut rates and the upcoming August payrolls report, the market's direction remains uncertain. What are your thoughts on this development? Feel free to share this article with your friends and discuss. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.