7Y Note Auction Preview: Mixed History

Today's $39B 7Y Note (CUSIP: 91282CJM4) auction at 1300ET/1800UK concludes November's coupon supply.

• The offsetting soft 2Y / solid 5Y auction double-header Monday provides an appropriate lead-in to today's sale, as the decidedly mixed recent history of 7Y auctions doesn't give much of a steer for expectations today.
• October's 7Y auction traded through modestly (0.2bp) with solid peripheral statistics (eg bid-to-cover 2.70x, primary dealer takeup 10.98%), following a modest tail in September which saw a 5-month low cover ratio and a 5-month high in primary dealer takeup.
• The 5-auction average result is a 0.1bp trade-through (biggest trade-through 2.0bp in Aug, biggest tail 1.5bp in July), averaging bid-cover 2.59x, primary dealers taking 11.6%, indirects 71.3%, and directs 17.2%. See table below.
• The solid if unspectacular 5Y sale yesterday (0.5bp trade-through) is arguably a better sign for 7s than the 2Y auction in that it suggested some underlying demand for the belly of the curve even at much lower yields than the previous auction, with an eye to potential Fed cuts over the coming years. Indeed the small trade-through for 5s was something of a relief given that 5s saw their biggest tail of the year at the Oct auction.
• The current 7Y when-issued yield at 4.44% (BBG) would approach 50bp below the October auction high yield, a similar magnitude in the setup to yesterday's 5Y.
• From a relative value perspective, 7s have been trading fairly steadily vs adjacent instruments on the curve with only very marginal cheapening amid the broader rally (5s-7s-10s butterfly at 8bp was 0bp 3 months ago).