Ahead of Wednesday's FOMC decision (where according to SOFR futures, the odds of a rate hike are a significant 38%, even as most traders expect no action by the Fed), we had the week's first two coupon auctions take place according to an abbreviated schedule, with the sale of $69BN in 2Y notes taking place at 11:30am, followed by $70BN in 5Y notes. And while the former was unexpectedly strong, the latter was one of the ugliest 5Y auctions in years.

Here are the details.

The 2Y auction priced at a high yield of 4.315%, up from 4.189%, and the highest since December 2024. More importantly, it stopped through the 4.320% When Issued by 0.5bps, the third stop through in a row, and the highest since January. 

The bid to cover was solid, at 2.662, it was also the highest since January. 

The internals were likewise solid, with Indirects taking down 56.6%, up from 55.5%, if below the recent average of 58.2%. And with Directs awarded 34.1%, roughly flat with 34.3% last month, Dealers were left with just 9.4% of the auction, the lowest since January. 

But if the 2Y auction was strong - and thus an indication that at least the primary bond buyers don't expect any imminent rate hikes - the 5Y auction was a dismal mirror image.

The bond priced at a high yield of 4.408%, a big jump from 4.20% in June and the highest since December '24. It also tailed the When Issued 4.399% by 0.9bps, which made it an unprecedented 14th tailing auction in a row, and the biggest tail since March.

The bid to cover was worse: it dropped to 2.282, the lowest in almost 5 years, since Sept 22. 

The internals were just as ugly, with foreign demand sliding to just 59.24%, the lowest Indirects award since July 2025. And with Directs awarded 27.22%, the most since January, Dealers were left holding 13.5%, the highest since March.

In short, today's two auctions - which took place within 90 minutes of each other - couldn't be more different. The impressive 2Y showed remarkable buyside demand, while the dismal 5Y auction, separated by just 3 years in maturity, was one of the ugliest auctions for the tenor in years. Whether it is because someone expects inflation to spike aggressively 3-5 years from today (but not in under 2 years), or just jitters ahead of the Fed, remains to be seen, and when we get next week's 3Y auction, we will have a much better sense of what drove the striking divergence in today's two auctions.