TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 10 TICKS LOWER AT 109-10+

T-notes sold as Amazon (AMZN) enters the market and as oil rises on renewed Hormuz tensions and as the US revokes Iran's license to sell oil. At settlement, 2-year +5.4bps at 4.166%, 3-year +5.6bps at 4.190%, 5-year +5.6bps at 4.260%, 7-year +5.8bps at 4.390%, 10-year +6.2bps at 4.533%, 20-year +6.1bps at 5.046%, 30-year +5.7bps at 5.043%.

THE DAY: Treasuries were weaker across the curve on Tuesday, with yields rising by around 5-6bps. The move was driven primarily by higher oil prices as renewed tensions in the Strait of Hormuz lifted crude benchmarks. Iran reportedly attacked several commercial vessels, including a Qatari LNG tanker and a Saudi tanker, over the past 24 hours, fuelling concerns over a potential US response, while Tehran maintained the view its actions remained within the guidelines of the recently agreed MoU. Ahead of the Treasury settlement, the US revoked Iran's licences to produce, deliver and sell energy products, sending crude prices higher into the settlement and adding further pressure to Treasuries.

Aside from escalating geopolitical tensions, Amazon (AMZN) entered the debt market with an 8-parter, and it is reportedly looking to raise USD 25bln, with potential rate-lock hedging adding pressure to the Treasury curve as the offering spans maturities from 3 to 40 years. Bloomberg reported that it saw USD 62bln of demand for the offering, so we will be looking to see if it upsizes the offering.

Elsewhere, the 3-year T-note auction was very strong, continuing the trend of healthy demand seen at recent front-end auctions following the June FOMC meeting. Despite some moderation in Fed rate hike expectations after last week's softer nonfarm payrolls report, the combination of still-elevated outright yields, lower rate volatility and reduced geopolitical uncertainty appears to be supporting demand for front-end Treasuries. Overall, the auction suggests investors remain comfortable buying front-end Treasuries at current yield levels despite the recent pullback in yields.

Economic data saw the US balance of trade deficit widen to USD 77.6bln from 55.9bln, a touch narrower than the expected USD 78.8bln deficit. Also, the NY Fed Survey of consumer expectations saw the year ahead expectations rise further to 3.7% from 3.5%, while the three-year-ahead rose to 3.3% from 3.1%, while the 5-year was maintained at 3.0%. Fed speak saw NY Fed President Williams express he feels more positive about inflation near term due to lower energy prices, but said inflation still feels quite high. He said policy is in a good place, and what happens with policy depends on risks and data. He also shared the view of Warsh that amid the uncertainty, forward guidance is not appropriate. 

Attention turns to the 10-year supply on Wednesday, as well as the FOMC Minutes, while next week sees the US CPI and PPI reports for June.

SUPPLY

Notes

• US sold USD 58bln of 3-year notes; stop-through 0.6bps
• US Treasury to sell USD 39bln of 10-year notes July 8th, and USD 22bln of 30-year bonds on July 9th; all to settle July 15th

Bills

• US sold 1-year bills at a high rate of 3.860%, B/C 3.14x; Sold six-week bills at a high rate of 3.635%, B/C 2.74x
• US to sell USD 100bln of 4-week bills (prev. 85bln) and USD 95bln of 8-week bills (prev. 85bln) on July 9th; to sell USD 72bln of 17-week bills (unch.) on July 8th; all to settle July 14th

STIRS / OPERATIONS

• Fed Pricing: 32bps (prev. Dec 30bps)
• EFFR at 3.63% (prev. 3.63%), volumes at USD 117bln (prev. USD 121bln) on July 6thSOFR at 3.63% (prev. 3.64%), volumes at USD 3.212tln (prev. USD 3.208tln) on July 6th
• NY Fed RRP op demand at 4.48bln (prev. 2.72bln) across 14 counterparties (prev. 13) on July 7th
• NY Fed T-Bill Purchases (4-11 month): Accepts USD 3.32bln of USD 24.52bln offered; Offer-to-cover 7.39x