TREASURY WRAP: T-NOTE FUTURES (M6) SETTLE 14+ TICKS HIGHER AT 110-25+

T-notes bull steepen led by the front-end as reports hint at progress towards the end of the war. At settlement, 2-year -8.3bps at 3.863%, 3-year -8.7bps at 3.887%, 5-year -8.8bps at 3.995%, 7-year -8.4bps at 4.170%, 10-year -7.6bps at 4.350%, 20-year -6.7bps at 4.926%, 30-year -5.2bps at 4.939%.

THE DAY: T-notes rallied across the curve with yields tumbling, particularly in the front-end, amid reports that the US and Iran are working towards a proposal to end the war. Optimism was echoed across the US and Pakistani media, although the Iranian press attempted to downplay the progress. Nonetheless, reports suggest the two sides are discussing a 14-point framework, although negotiations still appear ongoing.

Markets reacted positively to the headlines, with equities rallying, crude prices tumbling, and Treasuries surging. The sharp decline in oil prices helped ease inflation concerns while also boosting expectations that an end to the conflict could be nearing. Officials have repeatedly warned that the longer the war persists, the greater the upside risks to inflation.

US data once again took a back seat to geopolitics. ADP employment showed 109k private payrolls added in April, above both the prior 62k and the 79k forecast. However, Pantheon Macroeconomics reiterated that ADP remains an unreliable guide for Friday’s NFP report and cautioned against reading too much into the stronger print.

The Quarterly Refunding Announcement was largely in line with expectations, although the TBAC minutes hinted at a potential guidance adjustment as soon as the next refunding cycle (more below).

Overall, the ADP report and refunding details had limited impact on Treasury trade, with price action continuing to be dominated by geopolitics and the sharp decline in crude prices. T-notes ultimately settled firmly in the green, albeit off session highs.

SUPPLY

Quarterly Refunding

• Auction sizes were left unchanged, in line with expectations, while the Treasury also maintained its forward guidance, continuing to state that “based on current projected borrowing needs, Treasury anticipates maintaining nominal coupon and FRN auction sizes for at least the next several quarters.” Some desks expected a tweak to the language, with Barclays looking for guidance to shift to “at least the next few quarters.” Although no change was made at this meeting, the TBAC minutes imply the guidance could be adjusted as soon as next quarter. For full review, please click here.

Bills

• US sold 17-wk bills at high-rate 3.605%, B/C 3.13x

STIRS/OPERATIONS

• Fed Pricing: Dec +2.8bps (prev. +7.9bps)
• EFFR at 3.64% (prev. 3.64%), volumes at USD 113bln (prev. USD 111bln) on May 5th
• SOFR at 3.62% (prev. 3.63%), volumes at USD 3.148tln (prev. USD 3.113tln) on May 5th
• NY Fed RRP op demand at 1.633bln (prev. 1.12bln) across 7 counterparties (prev. 6) on May 6th