TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 4 TICKS HIGHER AT 109-08+

T-notes flattened as front-end yields rose on rising oil and hot import price data ahead of the weekend. At settlement, 2-year +3.4bps at 4.179%, 3-year +2.0bps at 4.212%, 5-year +0.9bps at 4.278%, 7-year -0.2bps at 4.402%, 10-year -1.2bps at 4.545%, 20-year -1.7bps at 5.067%, 30-year -2.1bps at 5.065%.

THE DAY: The Treasury curve flattened on Friday, with front-end yields rising as higher oil prices and firmer-than-expected import prices supported inflation expectations. Longer-dated yields, however, edged lower, likely reflecting position squaring ahead of the weekend.

Crude prices moved higher following another round of escalations in the US-Iran conflict. The US struck key infrastructure in Iran late on Thursday, including bridges and airports. Meanwhile, an oil tanker, albeit empty, was struck while docked at Kharg Island, keeping geopolitical risk premia elevated. Meanwhile, Axios reported the Trump administration is sending refueling planes to Israel in preparation for a potential military expansion against Iran. 

On the data front, import and export prices sent mixed signals. Export prices declined by more than expected, while import prices rose 0.3% M/M, well above the expected 0.7% decline. From an inflation perspective, the stronger import price data could support expectations for firmer core PCE inflation in the near term, given import prices feed into the Fed's preferred inflation gauge. Elsewhere, the University of Michigan Consumer Sentiment Index exceeded expectations, while one-year inflation expectations fell to 4.2% from 4.6%, below the 4.3% consensus. However, five-year inflation expectations were unchanged at 3.3%, disappointing expectations for a decline to 3.1%.

Fed Vice Chair Jefferson struck a balanced tone, saying current policy should support the labour market while allowing inflation to continue moving back towards the Fed's 2% objective as tariff and energy price effects fade. However, he added that if inflation fails to resume its decline, it could become appropriate to reconsider the current policy stance to ensure price stability is achieved.

Overall, the front end underperformed as higher oil prices and stronger import prices lifted inflation expectations, while longer-dated Treasuries found support from likely position squaring ahead of the weekend. The Fed also now enters its blackout period ahead of the July 29th FOMC meeting, with a relatively light US data calendar scheduled for next week.

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 to sell USD 92bln of 13-week bills and USD 79bln of 26-week bills on July 20th, to settle on July 23rd.
• US to sell USD 95bln of 6-week bills on July 21st, to settle on July 23rd.

STIRS / OPERATIONS

• Fed Pricing: Dec 22.7bps (prev. 23.7bps)
• EFFR at 3.63% (prev. 3.63%), volumes at USD 113bln (prev. USD 109bln) on July 16th
• SOFR at 3.62% (prev. 3.64%), volumes at USD 3.038tln (prev. USD 3.104tln) on July 16th
• NY Fed RRP op demand at 0.10bln (prev. 0.125bln) across 1 counterparty (prev. 1) on July 17th