TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 5 TICKS LOWER AT 107-10

T-notes chop to oil prices as eyes turn to inflation data and supply. At settlement, 2-year +2.6bps at 4.400%, 3-year +2.6bps at 4.476%, 5-year +2.5bps at 4.573%, 7-year +2.7bps at 4.683%, 10-year +2.0bps at 4.804%, 20-year +2.2bps at 5.270%, 30-year +2.0bps at 5.264%.

THE DAY: Treasuries were choppy on Tuesday following the return from the long weekend. T-notes moved lower overnight before moving higher through the US morning as oil prices came off their highs, although gains were pared into settlement - seeing T-note settle lower across the curve. Crude had initially been supported by comments from the Saudi Energy Minister that a number of energy facilities and utilities had been hit, temporarily halting some operations. However, oil later moved off its highs after the Qatari Foreign Ministry said it is working with regional partners and China to resume talks between the US and Iran.

The data highlight on Tuesday was the NY Fed SCE report, which saw inflation expectations little changed, while perceptions of the labour market deteriorated, albeit consumers saw a lower risk of losing their own jobs. The data had little impact on the Treasury market, with attention turning to US inflation data later this week alongside further Treasury supply.

The 3-year auction was solid, with the 0.1bp stop-through, above-average bid-to-cover, strong direct participation and low dealer allocation pointing to a healthy reception, particularly given the significant CPI event risk later this week. The substantially higher outright yield versus August likely helped support demand, although weaker indirect participation and the smaller stop-through prevented the result from being particularly strong.

Attention now turns to the US PPI and CPI reports due Thursday and Friday, respectively, which will be key in shaping Fed rate expectations ahead of next Wednesday's FOMC. Money markets currently assign around a 60% probability of a 25bp hike.

SUPPLY

• US sold USD 58bln of 3-year notes; stop-through 0.1bps
• US sold 6-week bills at a high rate of 3.740%, B/C 2.93x
• US sold 3-mth bills at high-rate 3.800%, B/C 2.61x; 6-mth bills at high-rate 3.890%, B/C 2.88x

STIRS / OPERATIONS

• Fed Hike Pricing via CME FedWatch: Sept 14.6bps (prev. 14.9bps), Dec 35bps (prev. 34.8bps).
• EFFR at 3.63% (prev. 3.63%), volumes at USD 103bln (prev. USD 109bln) on September 4th
• SOFR at 3.65% (prev. 3.66%), volumes at USD 2.888tln (prev. USD 2.949tln) on September 4th
• NY Fed RRP op demand at 0.63bln (prev. 0.68bln) across 3 counterparties (prev. 2) on September 8th