Three-Year Auction Outlooks According to Mizuho

Mizuho said the 3Y is cheaper than last month’s stop. The 2/3/5 fly is around the same level as last month’s auction. While dealers had to take down over 50% of that auction and 42.9% the last five auctions, it is possible the outright level and the 2.75% coupon draw out some buyers and dealers take down to go back to the 40% area. All in all the auction will go fine, better than last month due to the levels, the bank said.

BMO also notes the auction is cheaper vs last month and also note the 2/3/5Y fly has 3Y appearing cheap as this is the biggest 3Y sale since August 2010. Also expect 3Y yields will have room to move higher as the most recent Fed statement showed no sign of the Fed considering a pause yet. CPI on Friday is a risk where any result that is consensus or better will likely be viewed as supportive for continued hikes and thus drive the front-end to higher yields. The three previous auctions have all tailed, and BMO anticipates that trend will continue and expect a tail near the screws at the auction.