The US five-year auction failed badly. By 2 bps (therefore made 2 bps above subsequent market levels, with a slight lag). The indirect supply (including central banks) was decent, if not spectacular. The 5-year area is rich on the curve, by about 20 bps relative to an interpolated line between the 2- and 10-year yields, primarily reflecting notable reversal across the 2/5-year segment. Still, this is a bit disappointing after yesterday’s decent 2-year auction.
It’s also a bit of a reminder of Monday’s refund announcement, which is likely to be intense, with just a few changes to emissions, away from longer dates, to take some of the heat off. And tomorrow we have 7. It should really perform better than 5, since at least it has higher performance. The market reaction to the 5-year bond has been to increase yields. They’ve been on the move anyway, after the brief break below 4% for the 10-year period on Wednesday morning and some reasonable ISM data.
The 10-year yield rose back above 4.15%. We continue to think it will reach the 4.25% area as the March rate cut expectation continues to fade. But Thursday is the day that brings the biggest excuse for yields to test the decline. Our view is that if the core PCE turns out as expected, it would be worth facing some yield headwinds as it validates a good reading (2% inflation). But it has to be better than expected to negate our underlying tactically bearish view. Otherwise, we will raise again later, even if that has to wait until next week.