TREASURY WRAP: T-NOTE FUTURES (M6) SETTLE HALF A TICK HIGHER AT 109-08

Treasuries flatten as hawkish Fed Waller leaves markets fully pricing one 25bps hike by year end.  At settlement, 2-year +4.4bps at 4.123%, 3-year +3.5bps at 4.171%, 5-year +1.4bps at 4.258%, 7-year -0.4bps at 4.399%, 10-year -1.6bps at 4.556%, 20-year -2.9bps at 5.073%, 30-year -3.2bps at 5.063%.

THE DAY: Treasuries saw mixed price action to end the week, with the short end sold and the long end bid. 2yr yields eked out new YTD highs following a hawkish speech and Q&A from Fed's Waller, with money markets now pricing in one 25bps hike by year-end. Governor Waller, who was on the dove side in early 2026, has now notably shifted his stance following the latest FOMC meeting, amid both CPI and PPI coming in hot and NFP topping expectations in April. His concerns over the jobs market have eased: "Labour market is in balance and no longer the chief concern in determining path of policy". He has joined the "many" policymakers who would have preferred to remove the easing bias from the policy statement and noted it is "crazy" given recent data, to be talking about rate cuts in the near future. Waller did note he is not advocating for a hike at the moment, but cannot rule out hikes if inflation does not abate soon. On the balance sheet, he wants to run an ample reserve type system, not going back to a scarce reserve system. 

US data showed UoM Sentiment hitting a record low, down three months in a row. 1yr inflation expectations were 4.8% for May (prev. 4.7%) and the 5yr rose to 3.9% from 3.5%; price action at the time was driven by Waller's speech.

Geopolitical updates were many to end the week, ultimately leaving crude prices slightly higher on the day, and perhaps providing some relief on the long end. As it stands, Qatari and Pakistani officials have arrived in Iran to close in on a deal. Sky News Arabia reported that negotiations in Tehran have reached an understanding on the broad outlines regarding the nuclear issue; however, the Iranian FM spokesperson said the differences between the sides are deep and significant.

• Fed Pricing: Dec 26.2bps (prev. 19.9bps)
• EFFR at 3.62% (prev. 3.62%), volumes at USD 120bln (prev. USD 119bln) on May 21st
• SOFR at 3.51% (prev. 3.50%), volumes at USD 3.077tln (prev. USD 3.082tln) on May 21st
• NY Fed RRP op demand at 0.965bln (prev. 3.281bln) across 5 counterparties (prev. 9) on May 22nd