TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 1+ TICKS LOWER AT 106-00

Yields little changed despite drop in oil prices as eyes turn to next buyback announcement and auctions. At settlement, 2-year +0.2bps at 4.753%, 3-year +1.3bps at 4.826%, 5-year +1.7bps at 4.844%, 7-year +1.5bps at 4.901%, 10-year +1.6bps at 4.967%, 20-year +1.8bps at 5.343%, 30-year +2.3bps at 5.303%.

THE DAY: Yields were little changed across the curve on Tuesday despite tumbling oil prices amid hopes for diplomacy between the US and Iran. Several reports and comments from officials, including US President Trump, suggested that communications between the US and Iran occurred today, helping pressure oil prices.

The reports of potential diplomacy hit during the European morning and helped yields move off their highs back towards unchanged, before Treasuries meandered throughout the remainder of the session. There was little fresh economic data to digest, although there was plenty of Fed speak.

Collins said she supported last week's rate hike and sees an increased likelihood of scenarios in which inflation remains notably above 2%, noting that upside risks to inflation have increased while the labour market is on a better footing. Barkin similarly said the Fed hiked last week because risks to inflation outweigh risks to maximum employment, noting the hike will help restore price stability, although he said “we'll see” if further hikes are needed. Barkin added that he likes to think this period will be more akin to the 1990s mid-cycle adjustment. Williams did not comment on monetary policy but spoke on reserves, noting there should be no opportunity cost to holding reserves and that the Fed will adjust the supply of reserves depending on market conditions.

Meanwhile, the 2-year auction was mixed. The small tail and sharp decline in indirect participation took some shine off the auction, particularly given the substantially higher outright yield on offer. However, the above-average bid-to-cover, strong direct participation and broadly average dealer allocation suggested underlying demand was still healthy, leaving the auction broadly in line with recent averages.

Attention remains on developing geopolitics this week, while Treasury traders will also be eyeing the upcoming 5- and 7-year auctions and Wednesday's announcement for Thursday's Treasury buyback operation in the 20-30yr sector.

Supply

• US to sell USD USD 70bln of 5yr notes on September 23rd, and USD 44bln of 7yr notes on September 24th; all to settle September 30th.
• US to sell USD 28bln of 2yr FRNs on September 23rd, to settle September 25th.

Bills

• US to sell USD 90bln of 4-week bills and USD 84bln of 8-week bills on Sept 24th; USD 72bln of 17-week bills on Sept 23rd; atll to settle Sept 29th
• US sold 6-week bills at high rate 3.87%, B/C 3.03x

STIRS / OPERATIONS

• Fed Hike Pricing via CME FedWatch: Oct 13.3bps (prev. 13.9bps), Dec 33bps (prev. 33bps).
• EFFR at 3.88% (prev. 3.88%), volumes at USD 95bln (prev. USD 96bln) on September 21st
• SOFR at 3.85% (prev. 3.85%), volumes at USD 2.912tln (prev. USD 2.955tln) on September 21st
• NY Fed RRP op demand at 0.45bln (prev. 0.58bln) across 8 counterparties (prev. 15) on September 22nd