TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 13+ TICKS HIGHER AT 108-13+

Treasury curve flattened, reversing some of the post-FOMC steepening. At settlement, 2-year -0.4bps at 4.258%, 3-year -1.1bps at 4.314%, 5-year -2.4bps at 4.400%, 7-year -2.8bps at 4.538%, 10-year -3.4bps at 4.684%, 20-year -4.2bps at 5.237%, 30-year -3.9bps at 5.228%.

THE DAY: Treasury yields fell across the curve on Monday, with the long end outperforming to flatten the curve and unwind part of the pronounced steepening seen following last week's FOMC meeting. The move was supported by lower oil prices after US President Trump called off a major strike planned against Iran, while also saying the US is in contact with Tehran and that talks would begin on Monday afternoon. The prospect of renewed diplomacy initially sent crude sharply lower. However, Iran's Foreign Ministry denied that direct talks with the US were scheduled, while US officials also clarified that no new negotiations were planned, with the discussions Trump referred to instead taking place through mediators. Meanwhile, Al Mayadeen reported that the US had offered Iran a concession regarding the southern route through the Strait of Hormuz, although Iran reportedly rejected the proposal, insisting Hormuz would not fully reopen until the war was over. The pushback from Tehran saw crude rebound from session lows, although both WTI and Brent still settled sharply lower.

Despite the sharp decline in oil prices, the front end of the Treasury curve saw only modest gains, with money markets continuing to lean towards a September rate hike. Around 17bps of tightening is now priced for the meeting, implying roughly a 68% probability of a 25bp increase. Economic data had little lasting impact. The ISM Manufacturing PMI surprised to the upside, with the headline index rising to 55.6, the highest level since May 2022. The employment component returned to expansion at 52.8, its first expansionary reading in 33 months, while prices eased slightly but remained elevated and above expectations. Overall, the report pointed to continued resilience in US manufacturing and the labour market despite persistent cost pressures. Following the release, the Atlanta Fed's GDPNow estimate for Q3 growth was revised up to 6.2% from 5.0%.

Fed commentary came from NY Fed President Williams (remarks recorded on Friday), who reiterated that policy is well positioned and that he strongly supported last week's decision to leave rates unchanged. He added that further action would be appropriate if inflation is not on a path back towards 2%, while continuing to expect inflation to ease through the second half of the year as the effects of higher energy prices and tariffs begin to fade.

Overall, Monday's session appeared to be more of a reversal of last week's post-FOMC price action than a reaction to any single catalyst. The decline in oil prices helped unwind some of the inflation premium that had built into the long end of the curve following Chair Warsh's press conference, although resilient economic data and still-elevated Fed tightening expectations helped keep the front end relatively anchored.

• US Treasury Financing Estimates: Expects to borrow USD 739bln in Q3, up from the previous estimate of USD 671bln. USD 68bln higher than the initial estimate, but USD 87bln higher when excluding the higher-than-assumed beginning of quarter cash balance (USD 919bln vs USD 900bln). Expects to borrow USD 628bln in Q4, assuming end-quarter cash balance of USD 850bln.

• US sold 3-month bills at a high rate of 3.75%, B/C 2.61x; sold 6-month bills at a high rate of 3.855%, B/C 2.98x

• Fed Pricing: Sept 16.6bps (prev. 16.8bps), Dec 22bps (prev 24.2bps)
• EFFR at 3.63% (prev. 3.63%), volumes at USD 108bln (prev. USD 121bln) on July 31st
• SOFR at 3.66% (prev. 3.65%), volumes at USD 3.205tln (prev. USD 3.011tln) on July 31st
• NY Fed RRP op demand at 2.13bln (prev. 2.15bln) across 4 counterparties (prev. 4) on August 3rd