TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE UNCHANGED AT 109-18+

Yield curve steepens as soft NFP prompts markets to pare rate hike bets. At settlement, 2-year -4.1bps at 4.137%, 3-year -2.7bps at 4.163%, 5-year -1.1bps at 4.228%, 7-year unchanged at 4.351%, 10-year -0.2bps at 4.481%, 20-year +0.6bps at 4.986%, 30-year +0.9bps at 4.983%.

THE DAY: Treasuries rallied in the front-end following a softer-than-expected June nonfarm payrolls report, prompting markets to pare expectations for Fed tightening. The report showed payrolls increased by just 57k, well below the 110k consensus (for more analysis please click here).

The release also ended the run of stronger payroll reports seen over the previous three months. In addition, April and May payrolls were revised lower by a combined 74k, leaving the labour market on a weaker footing than previously thought.

The softer report saw traders scale back rate hike expectations, with money markets now fully pricing one 25bp hike by December rather than October previously. A cooling labour market would make it more difficult for the FOMC to justify further tightening, or at the very least strengthen the hand of the more dovish members of the Committee. That said, one payroll report alone is unlikely to materially alter the policy outlook. Chair Warsh stressed at last month's FOMC press conference that policymakers should focus on trends rather than individual data points, meaning upcoming labour market releases will be equally important in determining whether this marks the beginning of a broader slowdown.

Although Treasuries initially rallied across the curve following the data, gains faded further out the curve as the session progressed. By settlement, 10-year note futures were little changed, likely reflecting some profit-taking and position squaring ahead of the early Independence Day market close on Friday. The front-end, however, retained most of its gains as markets adjusted to a slightly less hawkish Fed outlook.

It is also worth noting a sizeable block trade in 5-year Treasury note futures. Around 10k September 2026 5-year contracts (ZFU6) traded at 106-315 at 14:03BST/09:03EDT. Subsequent buying activity in the order book suggests the block may have been buyer-initiated, although the underlying purpose cannot be determined. It may have formed part of a broader strategy, a hedge or a position adjustment.

Elsewhere, weekly jobless claims were broadly unchanged, while Fed commentary came from Daly ahead of the payrolls release. She reiterated that it is too early to determine the appropriate path for rates, said she would not provide false guidance, and stated her preference is for taking policy decisions gradually.

SUPPLY

Notes

• US Treasury to sell USD 58bln of 3-year notes on July 7th, USD 39bln of 10-year notes July 8th, and USD 22bln of 30-year bonds on July 9th; all to settle July 15th

Bills

• US sold 8-week bills at high-rate 3.650%, B/C 2.70x; sold 4-week bills at high-rate 3.605%, B/C 2.72x
• US to sell USD 92bln of 13-week bills and USD 79bln of 26-week bills on July 6th (sizes unchanged)
• US to sell USD 90bln (prev. 80bln) of 6-week bills and USD 52bln (prev. 50bln) of 52-week bills on July 7th.

STIRS / OPERATIONS

• Fed Pricing: 30bps (prev. Dec +36bps)
• EFFR at 3.63% (prev. 3.63%), volumes at USD 119bln (prev. USD 98bln) on July 1st
• SOFR at 3.66% (prev. 3.68%), volumes at USD 3.321tln (prev. USD 3.418tln) on July 1st
• NY Fed RRP op demand at 2.175bln (prev. 1.00bln) across 4 counterparties (prev. 4) on July 2nd