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US TSYS: Poorly Received 7y Auction Clears Way for Further Steepening

US TSYS
  • The 7y note auction extended a string of weak sales this week, as the 7y tailed by 1.3bps (awarded at 4.650% vs. WI of 4.637%). The bid-to-cover of 2.43 was also soft, and marked the lowest outright demand in a year. In response to the soft sale, the 7y yield extended pre-auction deadline gains, touching 4.6537%, dragging the 10y higher with it to 4.6357% - the highest level since early May.
  • Treasuries traded heavy after the poorly received auction, extending the pullback from 109-31+, the May 16 high and a key short-term resistance. Note that support at 108-15, the May 14 low, has been cleared. The break undermines the recent bullish theme and instead signals scope for a deeper retracement.
  • Fed rate pricing was little changed across the session, with the bulk of the price action taking place in the longer-end of the curve. ~13bps for September and a cumulative 32bps of cuts priced into year-end.
  • Fed's Beige Book detailed 'modest' price growth across the survey period, but markets proved unresponsive ahead of key PCE data due Thursday and Friday, which markets expect to be a key input for June Fed decision.
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