TD Securities: Softer Auctions: Canary In The Coal Mine?

TD Securities note that “this week's 3s, 10s, and 30s Treasury auction series was met with weaker demand, with all three auctions tailing. Such an occurrence is relatively rare, with just 11% of auction series since 2012 showing all three auctions tailing.”

• “While end-user takedowns at auctions have remained high in recent years, the recent drop in end-user demand is concerning as dealer capacity to backstop auctions remains lower due to limited balance sheet availability.”
• “With investor conviction remaining extremely low as the market is caught between still-firm domestic fundamentals and geopolitical risk, the 30y auction appears to have further destabilized sentiment.”
• “Treasury is likely to continue increasing auction sizes in coming months, bringing more 10y equivalent duration to market next year. This could continue to exert upward pressure on rates and term premia.”
• “We expect higher nominal and real rates to continue weighing on economic growth momentum, leading rates lower by year-end and in 2024.”
• “In the near-term, however, worries about a lack of demand for Treasuries could allow rates to re-test recent highs, with 10s potentially making a run at the 5% mark.”