2Y Note Preview: Fed Cut Speculation To See Sub 5% Handle

Monday's unusual holiday-compressed auction schedule starts with $54B 2Y auction at 1130ET/1630UK (5s sell 1.5 hours later).

• Today's sale represents a $3B upsizing from October's, and represents a test of market appetite for short-end instruments since the last sale, since which time soft jobs and CPI data have reinforced expectations that the Fed is done hiking and getting closer to cutting.
• Reflecting this, today is very likely to bring the first 2Y auction to bring a high yield below 5% since July.
• Previously in short-end supply: the 3Y Note auction on Nov 7 traded through for the first time in 3 auctions, and that was after NFPs but before CPI.
• The recent history of 2Y auctions has been relatively unremarkable. There hasn't been a 2Y auction tail since July's 0.3bp, though by the same token there hasn't been a trade-through the when-issued yield since May's 1.5bp - with the last two sales coming in "on the screws".
• October's auction saw bid-cover of 2.64x (5-auction average 2.79x) on a 5.055% high yield (on-the-screws), though primary dealers took 17.63%, the highest since April (5-auction average 14.75%).