US TSYS/SUPPLY: 5Y Auction Preview: Pre-Payrolls Test Of Fed Cutting Conviction

Today's $70B 5Y Note auction (1300ET) looks set to result in the lowest yield for this tenor at auction since April 2023. The current When Issued yield (per BBG) is now 3.63%, compared with the last 5 auction average high yield of 4.38%.

The on the run 5Y yield has dropped over 40bp in the past month and is set for its lowest monthly close since April 2023. That pullback in concession could prove to be an obstacle to a successful auction today: 3 of the last 4 5Y sales have tailed, with the last auction in July posting a high yield 1bp above WI. That of course was prior to the July FOMC, and the release of dovish July CPI and nonfarm payrolls data that have fuelled near-term rate cut bets. As such, today's sale will be a test of conviction of sorts on medium-term Fed cutting prospects ahead of next week's crucial nonfarm payrolls report.

That being said, it is trading relatively cheap on the 2s5s7s fly (-27bp, near the high of the range since the start of 2023), largely on account of 2Y yields pulling back even more quickly than 5s in a broader bull steepening move as Fed cuts are seen approaching soon. And recall that Tuesday's 2Y auction, a more acute test of near-term Fed cuts, stopped through (0.6bp). 

5-auction average stats are below.