Markets Prepare for 10-Year Note Auction

INTEREST RATE MARKET FUTURES

Futures are little changed across the curve ahead of today’s 10-year note auction. Markets will also be turning their attention to the upcoming release of the FOMC’s minutes for clues on the Federal Reserve’s next steps in monetary policy.

Bond prices fell on Tuesday, as markets reacted to the tariff delay and a below-average demand picture at a three-year Treasury note auction. The bid-to-cover ratio was 2.51 ($2.51 in bids to $1 of bonds), below the recent average of 2.61. Indirect bids, which consist of mostly foreign buyers, took 54.11% of the auction, below the average of 66.60%, while dealers ended up with a slightly higher share than usual, which often happens when demand is soft. Yields rose across the curve after the auction, and dealers sold 10-year notes to push for better pricing ahead of Wednesday’s $39 billion dollar 10-year auction. Dealers also sold the newly issued 3-year notes back into the market after their shorts were covered during the auction, adding some more pressure to prices.

$22 billion in 30-year bonds will be auctioned on Thursday. Demand for the longer-dated debt will likely be supported by recent comments by Bessent that he does not plan to increase the auction sizes of the longer-dated debt at current interest rates. That will leave the Treasury more dependent on Treasury bill issuance to finance its operations. The Treasury is expected to ramp up net T-bill issuance in order to replenish its cash balance closer to $850 billion by the end of the quarter. Concerns over a worsening budget deficit are viewed as largely priced in for now.

The 10-year Treasury yield is 4.42%, and the 30-year yield is 4.95%. The spread between the two- and 10-year yields is 50 bps.

CURRENCY FUTURES

The USD index is higher as investors weigh recent tariff announcements by President Trump. The dollar posted its strongest gains against the yen amid growing pressure on Japan to secure a trade agreement with Washington. Markets now turn their attention to the upcoming release of the FOMC minutes for further insights into the Federal Reserve’s policy outlook due at 1:00 p.m. CT.

Euro futures are lower as investors await further clarity on the US tariff picture ahead of a light week of economic data for the eurozone. There are reports that the US had proposed a deal to the EU maintaining a 10% baseline tariff, with exemptions for key sectors such as aircraft and spirits. However, Washington gave no indication it would extend exemptions to politically sensitive areas such as cars, steel, aluminum, or pharmaceuticals, despite EU requests. Markets now expect only one additional rate cut from the ECB this year. ECB officials have signaled that rates will likely be held steady at this month’s meeting following eight consecutive cuts since June 2024. With inflation aligning with the 2% target, policymakers are taking a cautious stance amid persistent global trade tensions and the euro’s recent appreciation.

British pound futures are little changed. Growing concerns over the UK’s fiscal outlook have pressured the sterling in recent days as the UK seeks to finalize a deal with the US to eliminate tariffs on British Steel. Chancellor Rachel Reeves hinted at possible tax hikes in the autumn budget to address a public finance gap. The Office for Budget Responsibility (OBR) has projected that public debt could surpass 270% of GDP by the early 2070s, driven by the financial strain of an aging population and escalating healthcare and pension expenditures. Additionally, increasing global tensions and growing demands for higher defense spending are contributing to long-term fiscal uncertainty. UK monthly GDP data is set to be released on Friday. Industrial production data for May is also due to be published on Friday as well as UK trade balance data. UK inflation remains sticky. Core inflation has shown little movement over the past year, causing concern among BoE officials and complicating rate cut decisions. UK money markets are pricing in a 66% chance of a rate cut in August.

Japanese yen futures are little changed after a continued slide following President Trump’s decision to place a 25% tariff on Japanese goods effective on August 1. Prime Minister Shigeru Ishiba and trade negotiator Ryosei Akazawa said Japan will keep trying to strike a trade deal with the US that benefits both sides, although they want concessions for its auto industry. Japan is unlikely to sign a trade deal with the US unless it includes a big cut to tariffs on autos and agriculture. Automobiles account for nearly 30% of Japan’s US-bound exports and are central to employment and industrial output. Akazawa said he held a 40-minute phone call with US Commerce Secretary Howard Lutnick in which the two agreed to actively continue negotiations. On Friday, the Bank of Japan is set to conduct outright purchases across four segments of the Japanese Government Bond yield curve, including JGBs with maturities of more than five years up to 10 years and those exceeding 25 years. These purchases are expected to help support the domestic bond market.

Australian dollar futures are little changed. The Reserve Bank of Australia held rates steady in a surprise move, leaving the benchmark interest rate at 3.85%. The RBA said it wanted to wait for more data on inflation to confirm that it remained on track to reach 2.5%. The on-hold decision follows earlier reductions in May and February and comes as core inflation has fallen back to around the top of the RBA’s 2% to 3% target band after a multiyear effort to restrain growth in prices. The RBA also said it remained cautious about the economic outlook regarding aggregate demand and supply in the country. Interest-rate reductions are widely expected to continue through the remaining months of 2025, with most economists expecting the benchmark rate to end the year closer to 3.0%.

STOCK INDEX FUTURES

Stock index futures edged higher in the overnight session as investors await any signs of progress on trade deals. President Trump said at least seven more notice letters will go out to countries on Wednesday.

Stocks had a muted reaction Tuesday to the tariff developments as markets weighed President Trump’s tariff letters against the three-week delay in their commencement. President Trump has seesawed on if the latest deadline is firm, saying on Monday that it was “not 100% firm,” while on Tuesday saying that no extensions would be granted. South Korea said it planned to ramp up trade talks over the coming weeks, while Japan offered a similar sentiment, although said it would not be willing to make concessions towards its core industries such as autos and agriculture. India has reportedly made its final trade offer with a deal in President Trump’s hands. Signals around India this week have suggested that progress has been made towards a deal although official no announcements have been made.

President Trump said the EU could receive a letter in the coming days, noting that he was not happy with European laws towards US tech companies. His comments come as reports have indicated that the US has proposed a deal to the EU that would retain a 10% baseline tariff, with exceptions for sensitive sectors such as aircraft and spirits. President Trump reiterated a 10% tariff on countries that align themselves with the BRICS group.

President Trump also announced a 50% tariff on copper imports into the US and a 200% tariff on pharmaceutical tariffs to reporters during a cabinet meeting on Tuesday. Trump suggested there would be a grace period of about a year for drug companies to move manufacturing to the US before they face steep tariffs. Pharmaceutical stocks dipped following the news but remained in positive territory. Trump also said he would announce tariffs on semiconductors, though he did not specify a rate or date.

The prolonged trade talks have extended uncertainty for businesses in the US, resulting in businesses holding back investment decisions in the US. Although, the new extension has offered some optimism that President Trump may be flexible towards some trade deals as time progresses. The effective tariff rate, calculated with the first round of letters, would be 17.6%, the highest level since 1934.

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