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TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 7+ TICKS LOWER AT 105-30

Pre-FOMC sessions of this kind follow a familiar pattern: ranges compress, positioning is pared, and the market largely waits, which is what the modest two-way moves across the curve describe.

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US CENTCOM says as of September 15th, US forces have redirected 103 commercial vessels to ensure compliance

The Security Council is discussing a draft statement in coordination with Saudi Arabia regarding developments in Yemen and maritime security, reports Al Araby

TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 7+ TICKS LOWER AT 105-30

The Houthi militia is digging trenches near Bab al-Mandab and laying mines in the sea, reports Al Arabiya citing sources

US FX WRAP: Dollar gains to detriment of G10 peers as FOMC awaits

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Yield curve steepens, but all eyes turn to Wednesday's FOMC rate decision. At settlement, 2-year -0.7bps at 4.661%, 3-year -1.1bps at 4.757%, 5-year -0.7bps at 4.824%, 7-year -0.7bps at 4.905%, 10-year -0.2bps at 4.996%, 20-year +0.7bps at 5.402%, 30-year +1.0bps at 5.364%.

THE DAY: The Treasury yield curve steepened modestly on Tuesday, with front-end yields marginally lower while long-end yields edged higher, although price action was relatively contained ahead of Wednesday's key FOMC rate decision.

The steepening came despite a rally in crude prices amid ongoing supply concerns. Libya's NOC said production and operations had been suspended at three oil fields after a valve was closed on the Al-Hamada-Zawiya pipeline, warning it may need to declare force majeure if the closure persists. Meanwhile, Saudi Arabia reportedly informed some European refiners that their September crude cargo loadings had been cancelled, while oil loadings were reportedly suspended at Saudi Arabia's key Red Sea port of Yanbu following the earlier attack on the East-West pipeline.

Meanwhile, the 20-year bond auction was very weak. The 2bps tail, below-average bid-to-cover, sharp decline in indirect participation and elevated dealer allocation pointed to a very soft reception despite the substantial increase in outright yield. The auction cleared at 5.420%, more than 20bps above the prior auction's 5.204%, suggesting the additional yield was insufficient to attract strong demand. Direct participation was a notable bright spot but was not enough to offset the significant deterioration in indirect demand. The significant event risk surrounding Wednesday's FOMC decision and updated SEP may have kept some participants on the sidelines.

The US data highlight was the September NY Fed Manufacturing Index, which pointed to slower but still-positive manufacturing growth alongside solid labour demand and intensifying price pressures, while supply constraints continued to weigh on the sector.

Overall, Treasuries largely meandered on Tuesday as participants awaited Wednesday's FOMC rate decision. A 25bp hike is largely expected, although an unchanged decision remains a risk. With the immediate decision heavily priced, attention will also be on the updated SEP and dot plot, alongside Chair Warsh's press conference, for guidance on whether policymakers expect further tightening beyond September.

SUPPLY

Notes

  • US sold USD 13bln of 20yr bonds; tail 2bps
  • US to sell USD 19bln of 10yr TIPS on Sept. 17th; to settle on Sept. 30th

Bills

  • US sold 6-wk bills at a high rate of 3.850%, B/C 3.16x
  • US to sell USD 72bln of 17-wk bills on September 16th; to sell USD 90bln of 4-wk bills and USD 85bln of 8-wk bills on Sept. 17th; all to settle on Sept. 22nd

STIRS / OPERATIONS

  • Fed Hike Pricing via CME FedWatch: Sept 23.6bps (prev. 23.2bps), Dec 52.6bps (prev. 50.7bps)
  • EFFR at 3.63% (prev. 3.63%), volumes at USD 91bln (prev. USD 105bln) on September 14th
  • SOFR at 3.62% (prev. 3.62%), volumes at USD 2.861tln (prev. USD 2.867tln) on September 14th
  • NY Fed RRP op demand at 0.70bln (prev. 1.42bln) across 2 counterparties (prev. 4) on September 15th
  • Treasury Buyback [10-30year TIPS, Liquidity Support, Max USD 500mln]: Accepts USD 500mln of USD 2.088bln offers, accepts 6 of 16 eligible securities. O/C 4.176%.
Context

The day's real information is the weak 20-year auction, where a tail alongside falling indirect participation and heavy dealer take-down is the established signature of absent end-demand; long-end concessions ahead of event risk tend to produce exactly this, and the question is whether demand re-emerges once the uncertainty clears or whether the soft bid persists into subsequent supply. The belly-versus-long-end split, with the front and intermediates firmer and the long bond cheaper, is consistent with both the auction concession and crude-driven term premium at the back end rather than any repricing of the policy path, which STIR pricing shows essentially unchanged. The next tells are the decision itself, the dot distribution rather than the median, and the press conference framing on whether further tightening is conditional or baseline; post-meeting follow-through in the 20-year sector and the upcoming TIPS supply will indicate whether the auction softness was event-driven or structural.

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