TREASURY WRAP: T-NOTE FUTURES (M6) SETTLE 10 TICKS LOWER AT 108-22+

Treasury selloff continues amid the worsening of inflation concerns as Middle-East conflict drags on . At settlement, 2-year +7.2bps at 4.118%, 3-year +8.1bps at 4.201%, 5-year +8.9bps at 4.326%, 7-year +9.2bps at 4.499%, 10-year +8.2bps at 4.667%, 20-year +6.3bps at 5.196%, 30-year +5.3bps at 5.177%.

THE DAY: Yields rose across the curve on Tuesday, with moves led by the front-end and belly as firmer oil prices rebuilt inflation concerns.

Energy markets continued to dictate rates price action as geopolitical uncertainty remained elevated despite President Trump holding off on a planned strike against Iran that was reportedly due to take place today. Trump has continued to leave the door open for renewed military action should negotiations fail, warning of “another big hit” if Iran does not agree to a deal. As such, markets likely need to see clearer signs of tangible diplomatic progress before oil prices — and in turn yields — can sustainably move lower.

Elsewhere, Fed speak was limited, although President Trump appeared to soften his rhetoric around Fed policy and incoming Chair nominee Warsh. Asked about the recent hawkish repricing in rates markets and whether he expects Warsh to deliver cuts, Trump said he would let Warsh “do what he wants” and that he believes he will “do a good job”.

Globally, Canadian inflation data came in softer than expected, contrasting with the recent run of firm US inflation reports. In Japan, Treasury Secretary Bessent spoke with BoJ Governor Ueda and said that excess FX volatility is undesirable, while Japanese Finance Minister Katayama warned authorities remain ready to take decisive FX action, helping support the Yen. Meanwhile, UK labour market data came in soft, while reports suggested Labour’s Burnham would not commit to maintaining existing manifesto tax pledges and had opened the door to future tax increases if he were to become Prime Minister, lending some support to Gilts.

Looking ahead, geopolitics remains the dominant focus for rates markets, although this week’s 20-year Treasury auction and FOMC Minutes will also be key.

• US to sell USD 16bln of 20-year bonds on May 20th; to settle June 1st; to sell USD 19bln of 10-year TIPS on 21st May; to settle May 29th

• US sold  6-week bills at a high rate of 3.580%, B/C 3.01
• US to sell USD 95bln of 8-week bills and USD 100bln of 4-week bills on May 21st; to sell USD 69bln of 17-week bills on May 20th; all to settle May 26th

• Fed Pricing: Dec 21.4bps (prev. 16.3bps)
• EFFR at 3.63% (prev. 3.63%), volumes at USD 118bln (prev. USD 123bln) on May 18th
• SOFR at 3.53% (prev. 3.55%), volumes at USD 3.159tln (prev. USD 3.157tln) on May 18th
• NY Fed RRP op demand at USD 12.9bln (prev. 7.193bln) across 22 counterparties (prev. 21)