TREASURY WRAP: T-NOTE FUTURES (M6) SETTLE 22+ TICKS HIGHER AT 109-13

T-notes were firmer on Wednesday, with yields lower across the curve as oil prices tumbled. At settlement, 2-year -7.8bps at 4.044%, 3-year -9.3bps at 4.111%, 5-year -10.2bps at 4.226%, 7-year -10.5bps at 4.392%, 10-year -9.9bps at 4.568%, 20-year -8.1bps at 5.120%, 30-year -7.2bps at 5.111%.

THE DAY: The decline in oil prices and, in turn, rise in yields continued to be driven by geopolitical headlines. After some of the more pessimistic rhetoric yesterday following the WSJ reporting, sentiment reversed through Wednesday’s session.

Reports suggested the Pakistani Army Chief may visit Iran tomorrow to announce a finalised draft agreement between the US and Iran, with work underway on the remaining details.

President Trump later said the two sides are in the final stages of negotiations, noting Iran wants to make a deal, although he reiterated his usual caveats that the US “may have to hit Iran harder, maybe not”.

Nonetheless, some press reports suggested gaps between the two sides still remain, keeping geopolitical uncertainty elevated despite the improvement in sentiment.

Elsewhere, there was no major US data release, although the FOMC Minutes leaned hawkish while the 20-year bond auction was broadly average (more below). The Minutes revealed that “many” policymakers would have preferred to remove the easing bias from the statement, while the "majority" viewed hikes as likely warranted should inflation remain persistent. Only several participants said it would likely become appropriate to lower rates if clearer signs emerge that disinflation is resuming or if the labour market weakens materially.

Despite the hawkish tone within the Minutes, markets saw little reaction as geopolitics and oil prices continued to dominate Treasury trade. Powell had also already alluded to much of the Committee’s thinking during his post-meeting press conference.

SUPPLY

Notes

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

Bills

US sold 17-wk bills at high-rate 3.590%, B/C 3.34x
US to sell USD 95bln of 8-week bills and USD 100bln of 4-week bills on May 21st;
US to sell USD 25bln 27-day cash management bills on May 21st; to settle May 22nd

STIRS/OPERATIONS

Fed Pricing: Dec 21.4bps (prev. 16.3bps)
EFFR at 3.62% (prev. 3.63%), volumes at USD 119bln (prev. USD 118bln) on May 19th
SOFR at 3.51% (prev. 3.53%), volumes at USD 3.111tln (prev. USD 3.159tln) on May 19th
NY Fed RRP op demand at 24.87bln (prev. 12.91bln) across 16 counterparties (prev. 22) on May 20th
NY Fed T-Bill Purchases (1-4 month): Accepts USD 6.58bln of USD 41.18bln offered; Offer-to-cover 6.26x