TD On Upcoming Supply Litmus Test

TD Securities note that "two weeks ago the 7-Year Treasury auction tailed a record 4.2bp, leading 7-Year rates to gap a further 12bp, reflecting impaired market functioning. Indirect bidders took just 38% of the auction (vs 64% average) - the lowest amount since 2013. Treasury's more detailed auction allotment data released today showed that weakness in the foreign and investment fund demand was to blame. Foreign investors took a record-low 8.1% of the auction and investment funds took just 49.1% - the lowest since Dec 2018 . With the $1.9tn stimulus set to be finalized later this week, pushing deficits to a record-high $3.6tn in FY2021, investors should be concerned about the reception of upcoming auctions. Recent Fedspeak did not push back on the rise in rates, leading us to revise our year-end outlook for the 10-Year to 2%. Concerns about the SLR expiration could also impact bank/dealer appetite. The 10-Year and 30-Year auctions on Wednesday and Thursday will be closely watched as litmus tests, with weak demand likely adding fuel to bearish sentiment. Note that the cheapening of 10s - outright and on the curve - suggests some auction setup."