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TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 5+ TICKS LOWER AT 104-27+

Sessions of this shape, early bull steepening reversing into a bear steepener led by the long end, have historically been the signature of term-premium and supply digestion dominating the rate view rather than the policy path itself.

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TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 5+ TICKS LOWER AT 104-27+

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T-notes chop on hawkish Fed speak, volatile geopolitics, weak auction and underwhelming buyback operation. At settlement, 2-year +1.7bps at 4.914%, 3-year +1.8bps at 4.987%, 5-year +4.6bps at 5.043%, 7-year +5.2bps at 5.101%, 10-year +6.9bps at 5.179%, 20-year +7.5bps at 5.532%, 30-year +7.0bps at 5.467%.

THE DAY: The Treasury curve saw two-way trade on Thursday, with initial bull steepening ultimately reversing into bear steepening. The early Treasury upside was led by the front end despite gains in oil and further hawkish Fed commentary, with FOMC Vice Chair Williams saying it is reasonable to see another rate hike by year-end. The morning bull steepening appeared to track gains in European government bonds following Wednesday's sharp global bond sell-off. However, front-end T-notes ultimately pared their gains, bringing front-end yields back towards unchanged, with the long end leading the sell-off. The curve ultimately settled as a bear steepener, led by the long end.

T-notes briefly moved higher across the curve as oil came under pressure following reports that the US and Iran had discussed a phased deal to reopen the Strait of Hormuz and end the blockade. However, the report included multiple caveats, while an unaffiliated Iranian journalist later pushed back on the report, although official channels have yet to deny it. Meanwhile, NBC News reported that Iranian President Pezeshkian wants a deal with the US before the midterms, ahead of his interview tonight with Fox News. Nonetheless, geopolitical tensions remain elevated, and crude moved higher again post-settlement after the Houthis announced they had targeted Saudi Aramco facilities in Yanbu and a sensitive target in Riyadh.

Elsewhere, the Treasury's 20-30yr buyback accepted just USD 4.08bln against a maximum of USD 6.0bln, with the underwhelming operation adding to pressure at the long end. The 7-year auction was also weak, producing its largest tail since March, although the reception was less alarming than Wednesday's woeful 5-year auction. The 0.7bp tail, below-average bid-to-cover and particularly weak indirect participation pointed to a soft reception despite the significant increase in outright yield since August. Strong direct participation provided some support and kept the dealer takedown close to average.

US data saw jobless claims remain low and stable, with another sub-200k initial claims print bringing the four-week average down to 202.25k from 204k. Meanwhile, the preliminary Chicago Fed unemployment rate nowcast was maintained at 4.1% ahead of the BLS report next Friday.

Supply

Notes

  • US sold USD 44bln of 7-year T-notes: Tail 0.7bps.

Bills

  • US sold 8-week bills at a high rate of 3.990%, B/C 2.76x; sold 4-week bills at a high rate of 3.850%, B/C 2.61x
  • US to sell USD 82bln of 26-week bills and USD 95bln of 13-week bills on September 28th; to sell USD 85bln of 6-week bills and USD 54bln of 52-week bills on September 29th; all to settle on October 1st.

STIRS / OPERATIONS

  • Fed Hike Pricing via CME FedWatch: Oct 17.7bps (prev. 17.7bps), Dec 38bps (prev. 37.1bps)
  • EFFR at 3.88% (prev. 3.88%), volumes at USD 101bln (prev. USD 103bln) on September 23rd
  • SOFR at 3.87% (prev. 3.87%), volumes at USD 2.946tln (prev. USD 2.94tln) on September 23rd
  • NY Fed RRP op demand at 0.63bln (prev. 0.46bln) across 3 counterparties (prev. 4) on September 24th
Context

The sequence here is the familiar one: hawkish remarks from a senior official lift the front end only modestly, while weak auction receptions and an undersubscribed buyback do the damage further out, leaving the belly-to-long-end bearing the move. The distinction worth drawing is between the policy leg and the supply leg: hike pricing at the front moved little, while consecutive tails and soft indirect participation point to end-user demand as the binding constraint, a pattern that in past heavy-issuance episodes has tended to persist until either concessions build or the auction calendar thins. Geopolitical headlines on the Gulf crude route drove the intraday chop through the energy channel, and such episodes have typically faded at settlement unless flows are physically disrupted. Follow-ons of note are the next refunding and auction cycle, whether indirect bid weakness repeats, and the labour report flagged in the wrap, which resets the front-end debate. As a daily wrap, the content is a record of what occurred rather than new information.

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