TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 10+ TICKS LOWER 108-22+

T-notes sold in response to rising oil prices and a hawkish Waller ahead of CPI and Chair Warsh. At settlement, 2-year +5.7bps at 4.269%, 3-year +5.7bps at 4.304%, 5-year +6.1bps at 4.367%, 7-year +6.4bps at 4.487%, 10-year +5.5bps at 4.616%, 20-year +4.8bps at 5.118%, 30-year +4.3bps at 5.102%.

THE DAY: Treasuries were weaker across the curve on Monday, with the curve bear flattening as renewed geopolitical tensions and hawkish Fed commentary lifted inflation expectations. Overnight, continued US-Iran tensions supported crude prices, while President Trump announced the US would take control of the Strait of Hormuz and impose a 20% charge on all cargo vessels transiting the waterway. Trump also said the US would reinstate its blockade on Iran, providing further support to energy prices. Crude was additionally underpinned by ongoing attacks involving Yemen and Saudi Arabia, reinforcing concerns over regional energy security.

Alongside the geopolitical backdrop, hawkish remarks from Fed Governor Waller added further pressure to Treasuries. Waller warned that another firm core inflation reading this week would see him consider a near-term rate hike, adding that he would need to see several months of softer core inflation before becoming confident that price pressures were moving back towards target.

The combination of higher oil prices, rising inflation expectations and Waller's comments saw yields rise as markets priced a greater probability of additional Fed tightening. Short-term interest rate futures increased the implied probability of a July rate hike to around 45%, from roughly 35% before his remarks.

Attention now turns to Tuesday's CPI report, which will provide the next major test for Fed pricing. A stronger-than-expected core inflation reading would likely reinforce expectations of a near-term rate hike, while a softer print could unwind some of Monday's hawkish repricing.

Markets will also be watching Chair Warsh's testimony before the House. Although his prepared remarks will have been finalised before the CPI release, investors will be listening closely to the Q&A to see whether he is pressed on the latest inflation data. That said, Warsh has consistently avoided providing explicit forward guidance, suggesting he is unlikely to offer any firm indication on the policy outlook.

SUPPLY

Bills

• US sold 3-month bills at a high rate of 3.760%, B/C 2.84x; sold 6-month bills at a high rate 3.860%, B/C 3.11x

STIRS / OPERATIONS

• Fed Pricing: Dec 35bps (prev. 33bps)
• EFFR at 3.62% (prev. 3.62%), volumes at USD 126bln (prev. USD 126bln) on July 10th
• SOFR at 3.55% (prev. 3.53%), volumes at USD 3.056tln (prev. USD 3.126tln) on July 10th
• NY Fed RRP op demand at 0.80bln (prev. 0.55bln) across 2 counterparties (prev. 3) on July 13th