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TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 11 TICKS LOWER AT 105-26+

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TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 11 TICKS LOWER AT 105-26+

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Treasuries fade post-BoJ gains as oil climbs. At settlement, 2-year +7.5bps at 4.745%, 3-year +8.4bps at 4.830%, 5-year +7.2bps at 4.858%, 7-year +7.1bps at 4.932%, 10-year +6.5bps at 5.004%, 20-year +5.2bps at 5.381%, 30-year +4.6bps at 5.336%.

THE DAY: Treasuries initially gained overnight, tracking JGBs higher following the BoJ rate decision. The BoJ hiked rates by 25bps as expected, but in a 7-2 vote, while the statement and Governor Ueda's presser did little to suggest the Bank is in a rush to hike again, although the door was left open to further rate increases.

Thereafter, Treasuries gradually sold off throughout the session, resulting in a bear-flattening of the yield curve. The downside coincided with upside in oil prices after reports that Saudi Arabia will not be delivering crude to Europe in October, extending the disruption after previous reports that September cargoes had also been cancelled.

However, as oil prices pared from their peaks to ultimately settle in the red, T-notes did little to follow suit and remained under pressure. US data saw Industrial Production and Manufacturing Production miss expectations, but the releases ultimately had little impact on the Treasury space. There were also plenty of block trades throughout the session, [with a full list available here].

There is little US data due next week aside from the Flash PMIs, although there is plenty of Fed speak alongside the 2-, 5- and 7-year Treasury auctions. From a macro perspective, the Trump/Xi meeting in the US will be closely watched, while the UNGA will also be in focus for any indication of the next steps from US President Trump regarding Iran.

SUPPLY

Notes

  • US to sell USD 69bln of 2yr notes on September 22nd, USD 70bln of 5yr notes on Sept. 23rd, and USD 44bln of 7yr notes on Sept. 24th; all to settle Sept. 30th
  • US to sell USD 28bln of 2yr FRN on Sept. 23rd, to settle on Sept. 25th.

Bills

  • US to sell USD 92bln of 13-wk bills and USD 79bln of 26-wk bills on September 21st; all to settle on Sept. 24th   STIRS / OPERATIONS

  • Fed Hike Pricing via CME FedWatch: Oct 13.8bps (prev. 13.9bps), Dec 33bps (prev. 32.2bps)

  • EFFR at 3.88% (prev. 3.63%), volumes at USD 100bln (prev. USD 90bln) on September 17th
  • SOFR at 3.85% (prev. 3.62%), volumes at USD 2.992tln (prev. USD 2.931tln) on September 17th
  • NY Fed RRP op demand at 0.58bln (prev. 0.28bln) across 3 counterparties (prev. 3) on September 18th
Context

Sessions where Treasuries initially track JGBs after a BoJ decision and then reverse on an oil supply story follow a familiar template: the overnight rally tends to fade because the BoJ transmission channel into USTs is correlation via global duration rather than a fundamental repricing, while a crude-driven inflation impulse hits the front and belly directly and produces exactly the bear-flattening seen here. Episodes of Gulf supply disruption have historically priced through the inflation-expectations component first, with the 2s5s and 2s10s flattening as the market weighs tighter-for-longer against the growth drag; the telling feature in this session is that T-notes stayed offered even as crude pared its gains, which suggests the move was not purely an oil story and leaves positioning or concession-building as the residual explanation. The sizeable coupon supply in the 2s, 5s and 7s next week is the near-term mechanical driver, and belly auctions into a flattening tape have tended to demand concessions that lean on the 5s sector, the very part of the curve that underperformed today. Fed hike pricing at the front, plus a heavy slate of Fed speak, frames the auctions: weak tails alongside hawkish commentary have in past cycles reinforced the flattening, while soft PMIs would be the natural counterweight. The diplomatic calendar, with Iran rhetoric in play, keeps the oil-supply tail risk two-sided, which is typically when the rates-oil correlation weakens and idiosyncratic supply dynamics reassert.

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