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TREASURY WRAP: T-NOTE FUTURES (M6) SETTLE 12 TICKS LOWER AT 110-01

T-note futures settling lower highlights the negative pressure from rising oil prices and inflation concerns following a hotter-than-expected CPI report.

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TREASURY WRAP: T-NOTE FUTURES (M6) SETTLE 12 TICKS LOWER AT 110-01

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T-notes settled lower across the curve on Tuesday as oil prices extended gains amid ongoing geopolitical tensions and a hotter-than-expected CPI report added to inflation concerns. At settlement, 2-year +4.3bps at 3.994%, 3-year +4.8bps at 4.026%, 5-year +5.1bps at 4.124%, 7-year +5.2bps at 4.292%, 10-year +5.1bps at 4.463%, 20-year +5.1bps at 5.027%, 30-year +4.8bps at 5.032%.

THE DAY: T-notes remained under pressure throughout the session as energy prices continued to rise. The geopolitical backdrop was largely unchanged from Monday, with markets still focused on the risk of renewed conflict in the Middle East after President Trump described the ceasefire as “very weak”. The main developments on Tuesday were reports that Iran had targeted Kuwait, a move strongly condemned by the UAE. Also, reports stated that Saudi Arabia struck Iran in early stages of the war as retaliation, keeping tensions high in the gulf. 

The rise in energy prices pushed yields higher across the curve with inflation expectations building. Meanwhile, the April CPI report came in hotter than expected, particularly across the core metrics, while services inflation also accelerated. The data saw markets increase Fed tightening expectations, with traders pricing around a 43% probability of a rate hike this year.

The CPI release triggered two-way trade in Treasuries, with T-notes initially rallying before quickly reversing lower ahead of the 10-year auction, which ultimately came in broadly in line with recent averages. 

SUPPLY

Notes

Bills

  • US sold 6-week bills at a high rate of 3.615%, B/C 2.80x; sold 1-year bills at a high rate of 3.650%, B/C 3.41x
  • US to sell USD 95bln of 8-week bills (prev. 85bln) and USD 100bln of 4-week bills (prev. 90bln) on May 14th; to sell USD 69bln of 17-week bills (prev. 69bln) on May 13th; all to settle May 19th

STIRS/OPERATIONS

  • Fed Pricing: 10.7bps (prev. Dec +6.1bps)
  • EFFR at 3.63% (prev. 3.63%), volumes at USD 114bln (prev. USD 123bln) on May 11th
  • SOFR at 3.60% (prev. 3.60%), volumes at USD 3.09tln (prev. USD 3.087tln) on May 11th
  • NY Fed RRP op demand at 1.20bln (prev. 1.13bln) across 7 counterparties (prev. 7) on May 12th
Context

This combination has heightened Fed tightening expectations, as evidenced by the market pricing a significant probability of a rate hike this year. The geopolitical climate, coupled with fluctuating yields across the curve, suggests a cautious sentiment prevailing in fixed income markets.

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