TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 8 TICKS LOWER AT 109-14+

Yields rise across the curve as Treasury trade continues to be dictated by energy markets, with data taking a back seat. 2-year +3.7bps at 4.082%, 3-year +4.0bps at 4.132%, 5-year +4.1bps at 4.213%, 7-year +4.1bps at 4.347%, 10-year +3.6bps at 4.489%, 20-year +3.3bps at 4.995%, 30-year +2.7bps at 4.991%.

THE DAY: T-notes were lower on Wednesday as higher oil prices weighed on fixed income, with yields rising around 3-4bps across the curve. The move higher in crude began overnight after the US and Iran exchanged attacks, with the US striking Qeshm Island while Iran targeted US bases in the Middle East.

Oil prices briefly pared after President Trump said the US is working on a deal with Iran and that Tehran had agreed not to pursue nuclear weapons. However, Iranian media pushed back on the remarks. Later in the session, Iran's Foreign Minister said communication channels with the US remain open but acknowledged there had been little recent progress in negotiations, helping crude prices move back towards earlier highs.

Treasuries remained under pressure throughout the session, although T-notes settled off the lows. Aside from swings in crude and ongoing geopolitical developments, the ISM Services PMI report surprised to the upside, while prices remained elevated and employment was little changed. However, once again, Treasury price action was driven far more by geopolitics and energy markets than by economic data.

Fed commentary broadly reinforced the current policy stance. Barr said policy is in a good place and is likely to remain there for some time, while Williams said there is no obvious case to adjust rates at present, describing policy as appropriately positioned. Williams characterised the labour market as healthy but acknowledged inflation remains elevated. The comments broadly echoed the Fed's Beige Book, which noted little to no change in employment across most districts while price pressures continued to rise at a moderate-to-strong pace, with most districts reporting firmer inflation than in the prior survey.

• Fed Pricing: Dec 20.2bps (prev. 17.5bps)
• EFFR at 3.62% (prev. 3.62%), volumes at USD 133bln (prev. USD 123bln) on June 2nd
• SOFR at 3.63% (prev. 3.65%), volumes at USD 3.148tln (prev. USD 3.224tln) on June 2nd
• NY Fed RRP op demand at 2.06bln (prev. 2.50bln) across 35 counterparties (prev. 32) on June 3rd
• Treasury Buyback [Liquidity support, 20-30year, max USD 2bln]: Accepts USD 2bln of USD 21.26bln offered; Offer to cover 10.63x