TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 6 TICKS HIGHER AT 109-07

T-notes bull steepen as crude slides on hopes for a US-Iran agreement. At settlement, 2-year -4.0bps at 4.126%, 3-year -4.0bps at 4.180%, 5-year -3.5bps at 4.259%, 7-year -3.8bps at 4.389%, 10-year -3.6bps at 4.532%, 20-year -3.0bps at 5.025%, 30-year -2.7bps at 5.012%.

THE DAY: Treasury yields moved lower on Tuesday, with the curve bull steepening as front-end yields led the move. The move was primarily driven by further geopolitical optimism, with President Trump suggesting a "victory" could be declared within two weeks, while reports indicated a memorandum of understanding between the US and Iran could be signed as soon as this week.

The improving outlook for negotiations weighed heavily on crude prices, helping ease inflation concerns and supporting Treasuries. Oil prices did, however, recover from session lows after President Trump announced the US would respond to Iran's attack on Apache helicopters operating over the Strait of Hormuz. As crude pared losses, Treasury yields also moved off their lows.

Alongside the decline in oil prices, equities came under pressure, particularly within the technology sector, with the Nasdaq leading losses. The weakness in risk assets may also have generated some haven demand for Treasuries.

On the data front, existing home sales came in stronger than expected, while ADP's weekly employment gauge showed an average of 29k jobs added per week over the past four weeks. Elsewhere, the April trade deficit narrowed to USD 55.9bln from USD 60.3bln, although it was slightly wider than the expected USD 55.5bln. The Atlanta Fed's GDPNow estimate was also revised higher to 3.3% from 3.0%.

Attention now turns to Wednesday's CPI report, which will provide a key test of the market's increasingly hawkish Fed outlook following Friday's strong nonfarm payrolls report. Money markets are now fully pricing one 25bp rate hike by year-end. Another firm inflation report could strengthen the case for more officials to join the statement dissenters from the last meeting in favour of removing the easing bias. Governor Waller has already suggested he intends to support such a move at the upcoming meeting.

SUPPLY

Notes

• US sold USD 58bln of 3-year notes; Tail 0.3bps.
• US to sell USD 39bln of 10-year notes on June 10th and USD 22bln of 30-year bonds on June 11th

Bills

• US sold 6-week bills at a high rate of 3.600%, B/C 3.25x; sold 1-year bills at a high rate of 3.750%, B/C 3.34x
• US to sell USD 69bln of 17-wk bills on June 10th;
• US to sell USD 70bln of 4-wk bills and USD 75bln of 8-wk bills on June 11th.

STIRS/OPERATIONS

• Fed Pricing: 25.1bps (prev. Dec 27.1bps)
• EFFR at 3.62% (prev. 3.62%), volumes at USD 108bln (prev. USD 117bln) on June 8th
• SOFR at 3.63% (prev. 3.63%), volumes at USD 3.115tln (prev. USD 3.131tln) on June 8th
• NY Fed T-Bill Purchases (4-11 month): Accepts USD 3.29bln of USD 31.18bln offered; Offer-to-cover 9.48x
• NY Fed RRP op demand at 0.58bln (prev. 1.83bln) across 13 counterparties (prev. 16) on June 9th