TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 9 TICKS HIGHER AT 104-16

Yields are lower across the curve, largely tracking global benchmarks. At settlement, 2-year -2.5bps at 4.787%, 3-year -3.1bps at 4.914%, 5-year -3.6bps at 5.023%, 7-year -3.9bps at 5.145%, 10-year -4.0bps at 5.267%, 20-year -2.6bps at 5.684%, 30-year -2.1bps at 5.640%.

THE DAY: Treasuries rebounded on Tuesday, tracking gains across global bonds, with JGBs moving higher overnight following a strong Japan 10-year auction. Some follow-through was seen during the European morning as OATs rallied in the wake of Le Pen's draft budget, easing some of the recent French fiscal concerns.

Meanwhile, oil prices were ultimately little changed after reversing overnight weakness. The initial downside may have reflected reports that the Saudi-backed coalition had reclaimed some key territory around the Bab el-Mandeb Strait, potentially improving shipping security, although Houthi media largely pushed back on claims of coalition advances. Meanwhile, a Saudi official suggested flows had restarted through the pipeline following the September 10th drone attack, with flows reportedly at 5.8mln BPD versus capacity of 7mln BPD. Nonetheless, crude subsequently reversed into positive territory. On Iran, reports noted the US and Iran remain engaged in talks, while Iran's Interior Minister said meetings with Qatar, a mediator between the US and Iran, were "constructive".

US data had little impact. Weekly ADP Employment Change rose to 23.75k from 20k, while the August US trade deficit widened by more than expected as imports increased faster than exports, partly reflecting an AI-driven surge in capital-goods imports. Oxford Economics expects net trade to pose a sizeable drag on Q3 GDP growth, although it sees roughly half of this being offset by booming equipment investment. Fed speak saw Daly lean somewhat hawkish, citing inflationary concerns around AI - she is concerned that AI, tariffs and higher energy costs could last longer than expected or compound each other — keeping inflation elevated and requiring more tightening.

Meanwhile, the US Treasury sold USD 58bln of 3-year notes. The modest 0.2bp stop-through and relatively low dealer allocation suggested the auction was comfortably absorbed, while the surge in direct demand was encouraging. However, the slightly below-average B/C and weak indirect participation prevented the auction from being characterised as particularly strong, despite the substantial yield pickup from last month's offering.

• US sold USD 58bln of 3-year notes; Stop through 0.2bps.
• US to sell USD 39bln 10yr notes on October 7th; and USD 22bln 30 year bonds on October 8th; all to settle on October 15th

• US sold 6-week bills at a high rate of 3.945%, B/C 2.78x
• US Treasury to sell USD 110bln of 4-week bills and USD 105bln of 8-week bills on October 8th; to sell USD 75bln of 17-week bills on October 7th; all to settle October 13th

• Fed Hike Pricing via CME FedWatch: Oct 4.9bps (prev. 6.0bps), Dec 25.5bps (prev. 27.1bps)
• EFFR at 3.88% (prev. 3.88%), volumes at USD 121bln (prev. USD 118bln) on October 5th

• SOFR at 3.89% (prev. 3.88%), volumes at USD 3.007tln (prev. USD 3.013tln) on October 5th

• NY Fed RRP op demand at 0.414 (prev. 1.00bln) across counterparties 16 (prev. 6) on October 6th

• Treasury Buyback [Liquidity support, 2-3-year nominal coupons, max USD 4bln]: Accepts USD 1.33bln of USD 14.76bln offers, accepts 12 of 33 eligible securities