TREASURY WRAP: T-NOTE FUTURES (M6) SETTLE 5 TICKS LOWER AT 109-00+

T-notes saw choppy trade amid mixed geopolitics but rally ahead of settlement as Trump holds off on Iran attack for now. At settlement, 2-year -0.8bps at 4.071%, 3-year -0.1bps at 4.143%, 5-year -0.7bps at 4.260%, 7-year +0.2bps at 4.431%, 10-year +0.6bps at 4.603%, 20-year +0.5bps at 5.146%, 30-year +1.2bps at 5.134%,

THE DAY: Treasuries saw choppy trade on Monday as T-notes continued to track swings in crude prices, with the curve steepening modestly. With no tier one US data or Fed speakers on the docket, focus remained firmly on developments in the Middle East.

T-notes gapped lower at the Sunday reopen after oil prices jumped following comments from President Trump over the weekend, warning that “the clock is ticking” for Iran. The move weighed on Treasuries in overnight trade.

However, T-notes reversed through the European morning as crude prices pared from highs, with Treasuries hitting session peaks as oil touched lows. The pressure in crude followed reports from Tasnim suggesting the US had agreed in a new draft text to lift Iranian oil sanctions during negotiations. Al Arabiya also reported that Iran had withdrawn its demand for compensation and agreed to a long-term nuclear freeze rather than a full dismantling of its nuclear programme.

However, reports also suggested fundamental differences between the sides still remain, while the US said Iran’s updated proposal was insufficient to end the war. US officials also denied reports regarding sanctions relief, while President Trump said he was not open to concessions for Tehran following its latest response. The pushback saw oil prices gradually rebound through the US session, pulling T-notes off earlier highs. Further pressure emerged ahead of settlement after Israeli media, citing a US source, reported that a resumption of strikes against Iran was viewed as a matter of when rather than if, helping crude prices extend gains into the close. 

However, T-notes rallied around settlement after President Trump posted on Truth Social that he had called off a planned attack on Iran following requests from Saudi Arabia, the UAE and Qatar. The headlines sent crude prices sharply lower, reversing much of the afternoon strength. Trump said Gulf allies had urged the US to delay military action as “serious negotiations” are now underway and expressed confidence that a deal acceptable to the US could still be reached, including guarantees preventing Iran from obtaining nuclear weapons. Nonetheless, Trump added that officials have been instructed to remain prepared for a large-scale assault at a moment’s notice should negotiations fail.

Elsewhere, UK political developments also remained in focus. A spokesperson for Manchester Mayor Andy Burnham fully ruled out changing Chancellor Reeves’ fiscal rules should Burnham become Prime Minister, helping support Gilts after uncertainty over the weekend regarding his fiscal stance.

Looking ahead, the focus this week remains firmly on geopolitics but the 20-year Treasury auction and FOMC Minutes will also be key events for rate markets.

• 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 sold 3-month bills at a high rate of 3.600%, B/C 3.17x; Sold 6-month bills at a high rate of 3.615%, B/C 3.07x
• US to sell USD 85bln of 6-week bills on May 19th (prev. 80bln)

• Fed Pricing: Dec 16.3bps (prev. 16.5bps)
• EFFR at 3.63% (prev. 3.63%), volumes at USD 123bln (prev. USD 120bln) on May 15th
• SOFR at 3.55% (prev. 3.56%), volumes at USD 3.157tln (prev. USD 3.115tln) on May 15th
• NY Fed RRP op demand at 7.19bln (prev. 0.65bln) across 21 counterparties (prev. 5) on May 18th
• NY Fed T-Bill Purchases (1-4 month): Accepts USD 6.58bln of USD 41.18bln offered; Offer-to-cover 6.26x