TREASURY WRAP: T-NOTE FUTURES (M6) SETTLE 30 TICKS LOWER 109-05+

T-notes moved lower across the curve on Friday, with yields rising as higher oil prices added to inflation fears. At settlement, 2-year +6.9bps at 4.084%, 3-year +9.1bps at 4.147%, 5-year +11.3bps at 4.262%, 7-year +11.8bps at 4.428%, 10-year +11.4bps at 4.597%, 20-year +11.3bps at 5.146%, 30-year +10.0bps at 5.130%.

THE DAY: Treasury trade was once again dictated by crude price action and ongoing geopolitical uncertainty. Oil prices rallied throughout the session, weighing on T-notes and pushing yields higher across the curve as inflation concerns rebuilt. 

The geopolitical backdrop remains fluid. Iran’s Foreign Minister suggested the US had reached out regarding further negotiations, although markets remain wary that President Trump could authorise a resumption of strikes against Iran once he returns to the US later tonight, with some desks expecting any decision to potentially come over the weekend.

On the data front, Industrial Production and Manufacturing Production both topped expectations, although the releases generated little meaningful market reaction, with focus remaining firmly on oil prices and geopolitics.

Meanwhile, Fed speak focused on the balance sheet debate ahead of Fed Chair nominee Warsh’s expected arrival at the Fed. Fed’s Barr pushed back against arguments for a materially smaller balance sheet, potentially setting up future debate within the Fed given Warsh’s preference for a smaller balance sheet and reduced holdings of longer-dated Treasuries.

Elsewhere, Gilts also came under pressure amid growing political uncertainty in the UK. The Manchester Mayor Burnham is looking to re-enter parliament, while Streeting’s resignation potentially sets up a future leadership contest involving Burnham, Streeting and Starmer. The weakness in Gilts added to the broader bearish tone in global fixed income markets and likely contributed to some follow-through pressure in Treasuries.

Overall, price action remained dominated by energy markets and geopolitics, with higher oil prices lifting inflation expectations and weighing on the Treasury complex.

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

• US to sell USD 89bln of 13-week bills (prev. 89bln) and USD 77bln of 26-week bills (prev. 77bln) on May 18th.
• US to sell USD 85bln of 6-week bills on May 19th (prev. 80bln)

• Fed Pricing: Dec 16.5bps (prev. 11.9bps)
• EFFR at 3.63% (prev. 3.63%), volumes at USD 120bln (prev. USD 123bln) on May 14th
• SOFR at 3.56% (prev. 3.59%), volumes at USD 3.115tln (prev. USD 3.119tln) on May 14th
• NY Fed RRP op demand at USD 0.647bln (prev. 2.034bln) across 5 counterparties (prev. 8)