The US Treasury will auction 2 year notes. Below is some color from BMO:
Today’s $69 bn 2-year auction comes amid the bond-bullish tone-shift that has defined the last several weeks of price action in the Treasury market. While there isn’t a compelling outright discount with WI 2-year rates at 3.45%, there is a sizable curve-concession with 2s/10s back below the 100-day moving-average of 59.5 bp, and more than 15 bp off the steeps achieved a couple of weeks ago. After reaching as low as 3.38% last Tuesday, the back-up in 2-year rates off the local lows has coincided with a delaying of rate cut expectations into the second half of 2026. Still, the broader cutting bias remains intact with 2-3 cuts expected by year-end, and the market-implied terminal policy rate anchored near 3.0%. Of course, renewed global trade policy uncertainty has, once again, increased the market’s sensitivity to fresh tariff headlines, although that risk didn’t correspond to larger auction tails in 2025. Fundamentally, policymakers have refocused on the inflation side of the dual mandate and while that doesn’t necessarily make 2-year rates look attractive below 3.50%, we suspect that the magnitude of the curve concession is sufficient for a small stop-through at 1pm ET.
-Vail Hartman, Delaney Choi, and Ian Lyngen
Pros
- Consumer and business inflation expectations have eased substantially from the post-Liberation Day extremes from 2025.
- Households have continued to report a pessimistic outlook for the labor market and personal finances over the next year.
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Six of the last nine 2-year auctions stopped-through, and by an average of 0.8 bp.
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January’s 2-year auction was notably well-received, clearing an impressive 1.5 bp below the WI yield at the bidding deadline for the largest stop-through since August 2025.
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2s/10s has pushed below 60 bp for the first time since January, leaving the curve ~15 bp off the early-February steeps.
Cons
- The Fed’s wait-and-see approach has been reinforced by the various risks and uncertainties linked to the recent tariff drama.
- The bar is higher for the next rate cut in light of the stabilization in the labor market, a dynamic that was clearly communicated from the Fed.
- Geopolitical concerns have kept energy prices near the local highs and with Iran remaining an open question, the stickiness of breakevens has a degree of fundamental support from the near-term balance of risks.
- There is an overhang of uncertainty whether Trump’s legal alternatives to impose tariffs will be able to completely replace the revenue stream provided by the IEEPA tariffs.
- With WI 2-year rates at 3.45%, the auction is expected to clear at the lowest yield since August 2022.
