TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 13 TICKS LOWER AT 108-27+

Treasury yields rose across the curve on Monday as oil prices climbed further amid escalating tensions in the Middle East. At settlement: 2-year +3.0bps at 4.213%, 3-year +3.6bps at 4.254%, 5-year +4.7bps at 4.325%, 7-year +4.5bps at 4.453%, 10-year +4.5bps at 4.594%, 20-year +4.2bps at 5.118%, 30-year +4.0bps at 5.112%.

THE DAY: Treasuries sold off across the curve as escalating geopolitical tensions pushed oil prices higher in an otherwise quiet week for US data. The US and Iran continued exchanging strikes over the weekend, with President Trump saying the US had hit Iran "very hard" in honour of the three American service members who were killed.

Oil prices were volatile throughout the session. Crude initially gapped higher before paring gains after Iran's Foreign Ministry said negotiations could still be pursued if they served national interests, adding that intermediaries had exchanged messages with Tehran in recent days and that Iran would not abandon talks with the US. Prices came under further pressure after Reuters reported that mediators had proposed a 10-day cessation of strikes in an effort to revive the US-Iran interim deal. However, crude later reversed higher after the Houthis announced a ban on maritime navigation for Saudi-linked vessels, while President Trump warned that any future killing of an American soldier by Iran would be met with overwhelming retaliation. Additional support came late in the session after reports that the US was preparing further military action against Iran in the coming days, alongside reports of fresh explosions in Jordan following another Iranian attack.

With little in the way of US economic data and the Fed now in its blackout period ahead of the July 29th FOMC meeting, geopolitics remained the dominant driver of market price action. Looking ahead, WSJ's Nick Timiraos noted that headline PCE is expected to decline 0.07% M/M in June, lowering the annual rate to 3.7%, citing economists who mapped the recent CPI and PPI reports into the PCE report.

Overall, the renewed rise in oil prices reinforced inflation concerns and prompted markets to increase expectations for further Fed tightening. Money markets now fully price a 25bp rate hike by year-end, with October almost fully priced.

SUPPLY

Notes

• US to sell USD 13bln of 20yr bonds on July 22nd, to settle on July 24th; to sell USD 21bln of 10-year tips on July 23rd; to settle on July 31st

Bills

• US sold 3mth bills at high-rate 3.730%, B/C 3.00x; sold 6mth bills at high-rate 3.835%, B/C 2.94x
• US to sell USD 95bln of 6-week bills on July 21st, to settle on July 23rd.

STIRS / OPERATIONS

• Fed Pricing: Dec 27.7bps  (prev. 22.7bps)
• EFFR at 3.63% (prev. 3.63%), volumes at USD 111bln (prev. USD 113bln) on July 17th
• SOFR at 3.59% (prev. 3.62%), volumes at USD 3.03tln (prev. USD 3.038tln) on July 17th
• NY Fed RRP op demand at 0.03bln (prev. 0.10bln) across 6 counterparties (prev. 1) on July 20th
• NY Fed T-Bill Purchases (1-4 month): Accepts USD 5.18bln of USD 32.48bln offered; Offer-to-cover 6.27x