TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 26 TICKS LOWER AT 106-08

Yield curve flattens after hawkish Waller and hot CPI reignite 50bps debate. At settlement, 2-year +17.2bps at 4.738%, 3-year +15.6bps at 4.780%, 5-year +13.0bps at 4.812%, 7-year +11.5bps at 4.885%, 10-year +10.1bps at 4.985%, 20-year +8.1bps at 5.388%, 30-year +7.7bps at 5.352%.

THE DAY: There was a notable hawkish repricing on Tuesday, primarily driven by commentary from Fed Governor Waller and the hotter-than-expected October CPI report.

Waller stated that, at a minimum, the Fed needs to reverse its three previous interest rate cuts, although he stressed that he is not "super hawkish", does not want to slam the economy and is not looking to tighten policy by 150-200bps. He also suggested that his Fed colleagues do not believe rates are currently at the appropriate level. Waller ignited the debate around a potential 50bps December hike, stating that further tightening is needed sooner rather than later to return inflation to target, and that a half-point increase may be warranted if October core CPI came in around 0.3% or higher. He added that he would support a 25bps hike even if the October CPI report showed improvement.

The October CPI report subsequently came in hotter than expected, with core prices rising 0.3% M/M, above the 0.2% forecast, reinforcing speculation around a larger December hike. Money markets shifted hawkishly following the developments, with approximately 27.5bps of tightening now priced for December, implying a fully priced 25bps hike and around a 10% probability of a 50bps move. The repricing prompted a notable bear flattening of the Treasury yield curve, with the 2-year yield rising as much as 20bps intraday, while the 30-year rose around 10bps at its highs.

Elsewhere, Fed's Logan (2026 voter, hawk) said the Fed clearly needs at least two further 25bps hikes and that it may be possible to raise rates more rapidly this winter than it has so far. However, she suggested it would make sense to pause after two additional hikes to assess whether further tightening is necessary. Schmid (2028 voter, hawk) also struck a hawkish tone, describing current policy as fairly accommodative and highlighting concerning underlying inflation trends beyond the energy-driven pressures.

The USD 42bln 10-year Treasury auction was notably weak, although it had little market impact given the substantial repricing already seen during the session. The offering tailed by 1bp, compared with the prior auction's sizeable 1.7bp stop-through, while the bid-to-cover ratio fell to 2.46x from 2.77x. Indirect participation slumped to 61.2% from 80.3%, while dealers were left with a larger 9.8% allocation, although direct participation improved to 29.0% from 17.1%.

• US to sell USD 25bln of 30-year bonds on November 12th.
• US sold USD 42bln of 10-year notes; tails 1bps

• Fed Hike Pricing via CME FedWatch: Dec 27.4bps (prev. 21.1bps), Mar 58.5bps (prev. 39.1bps).
• EFFR at 3.88% (prev. 3.88%), volumes at USD 95bln (prev. USD 105bln) on November 9th
• SOFR at 3.88% (prev. 3.89%), volumes at USD 3.1tln (prev. USD 3.174tln) on November 9th
• NY Fed RRP op demand at 0.15bln (prev. 0.25bln) across 3 counterparties (prev. 3) on November 10th