TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 13+ TICKS HIGHER AT 108-27
Treasury yields lower across the curve as oil prices decline, easing inflation fears. At settlement, 2-year -4.3bps at 4.198%, 3-year -4.7bps at 4.248%, 5-year -5.4bps at 4.333%, 7-year -5.6bps at 4.472%, 10-year -5.3bps at 4.623%, 20-year -4.9bps at 5.183%, 30-year -4.0bps at 5.186%.
THE DAY: Treasury yields were lower across the curve on Tuesday, with the front end outperforming as oil prices tumbled on renewed optimism surrounding the US-Iran conflict. Brent (Oct '26) fell back below USD 80/bbl after reports from Qatar suggested the language of a deal had been drafted, while source reports indicated an arrangement for the full reopening of the Strait of Hormuz could be announced shortly.
The decline in crude prices helped ease inflation concerns, supporting Treasuries and prompting participants to pare back some Fed rate hike expectations. Despite the repricing, money markets continue to lean towards a 25bp September hike, currently assigning around a 57% probability to such an outcome, versus 43% for rates to remain unchanged.
US economic data had little lasting impact. The JOLTS report showed job openings fell by more than expected in June, while the quits rate was little changed and the vacancy rate edged lower. Overall, the report pointed to a labour market that continues to cool gradually rather than deteriorate materially, with Oxford Economics noting the data does not warrant concern. Meanwhile, the June trade balance posted a slightly wider-than-expected deficit of USD 73.3bln (exp. USD 73.0bln), with the US-China trade deficit widening to USD 15.8bln from USD 14.4bln. Following the releases, the Atlanta Fed's GDPNow estimate for Q3 growth was revised down to 5.9% from 6.2%.
Fed commentary came from Philadelphia Fed President Paulson, who said last week's decision to leave rates unchanged was "not a close call", describing current policy as mildly restrictive, which she believes is appropriate. She reiterated that she remains open-minded on the future policy path, noting that if inflation does not continue to move towards 2%, the Committee should be prepared to recalibrate policy, either through higher interest rates or by keeping rates at their current level for longer.
Attention now turns to Wednesday's Quarterly Refunding Announcement, before Friday's nonfarm payrolls report, which will provide the next key update on labour market conditions.
Bills
- US sold 52-week bills at high rate of 3.88%, B/C 3.62x; sold 6-week bills at a high rate of 3.640%, B/C 2.93x
- US to sell USD 110bln of 4-week bills and USD 100bln of 8-week bills on August 6th; To sell USD 72bln of 17-week bills on August 5th; all to settle August 11th
STIRS / OPERATIONS
- Fed Pricing via CME Fed Watch: Sept 14.2bps (prev. 16.8bps), Dec 32bps (prev 35bps)
- EFFR at 3.63% (prev. 3.63%), volumes at USD 111bln (prev. USD 108bln) on August 3rd
- SOFR at 3.65% (prev. 3.66%), volumes at USD 3.055tln (prev. USD 3.205tln) on August 3rd
- NY Fed RRP op demand at 2.25bln (prev. 2.13bln) across 3 counterparties (prev. 4) on August 4th
- NY Fed T-Bill Purchases (1-4 month): Accepts USD 5.18bln of USD 36.70bln offered; Offer-to-cover 7.09x
Sessions of this kind, where a geopolitical de-escalation in a major energy corridor drags crude lower and takes the curve with it, follow a well-worn sequence: the oil leg leads, breakevens and rate-hike pricing soften, and the front end outperforms because the transmission runs through the near-term inflation risk premium rather than through term premium at the long end. The bull steepening here is the tell that this was read as an inflation story, not a growth story; soft growth data alone would more typically pull the long end down harder. The distinction worth drawing is between a durable supply-side relief and a headline-driven peace premium, since episodes built on draft deal language and source reports have historically reversed quickly when negotiations stall, taking both the oil and rates legs back with them. The official commentary noted is the familiar pattern of a policymaker describing policy as mildly restrictive while keeping both hiking and holding open, which tends to cap how far front-end repricing runs ahead of a decision. The follow-ons that have mattered in comparable stretches are confirmation or denial of the energy corridor headlines, the quarterly refunding's supply sizing against a heavier bill calendar, and the payrolls print, which has historically been the release that resolves whether a softening labour signal is cooling or deterioration.