TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 9+ TICKS LOWER AT 104-11+

Yield rally despite despite soft jobs report and lower energy prices. At settlement, 2-year +3.6bps at 4.827%, 3-year +5.2bps at 4.958%, 5-year +5.0bps at 5.059%, 7-year +4.5bps at 5.171%, 10-year +3.8bps at 5.281%, 20-year +2.9bps at 5.677%, 30-year +1.9bps at 5.632%.

It was a choppy day for T-notes, with the curve sold. Overnight, Fed's Logan (2026 voter, hawk) said at least 50bps or more of further Fed rate hikes are needed and that several additional hikes are required to reverse last autumn's cuts; otherwise inflation will not return to 2%. However, she also acknowledged that elevated longer-term yields may partly reflect higher term premiums, which could lessen the need for policy tightening.

The highlight was the US Nonfarm Payrolls report. Ultimately, it was a weak report, with just 29k jobs added versus the 90k consensus, while the prior was revised down to 133k from 162k. The two-month net revision was -60k, taking the three-month average to 50.7k from 71k. The unemployment rate also ticked up to 4.2% from 4.1%; notably, the Fed median sees unemployment at 4.1% through 2029, while the longer-run median stands at 4.2%. The initial reaction was, as expected, dovish, with yields falling across the curve as participants continued to price out the chance of an October rate hike. However, much of the move subsequently pared, with yields ultimately settling largely higher across the curve.

Although the report was soft on the headline, it is worth noting that the Fed tends to focus on trends rather than individual data points. The combination of the two-month downward revision and weak September payroll growth points to a softer employment backdrop, although the Fed's primary focus remains on inflation and officials are still likely to characterise the labour market as at or close to full employment. The September CPI report on October 14th will therefore be key in shaping Fed rate expectations. Even with Williams, Bowman and Jefferson signalling support for patience in October, there remains scope for hawkish dissent, particularly from Logan following her remarks overnight.

Elsewhere, oil and diesel prices were lower following coordinated European measures to release diesel stocks and alleviate ongoing supply concerns.

Despite the combination of weaker labour data and lower energy prices, Treasuries struggled to sustain the initial rally. There was no obvious catalyst for the reversal, although some profit-taking/positioning following Thursday's sizeable Treasury rally may have played a role. More broadly, participants may require further evidence of a sustained deterioration in the labour market and/or easing inflation before pushing yields materially lower, particularly with inflation still above target and geopolitical and fiscal/issuance risks remaining in focus.

• US to sell USD 39bln 10yr notes on October 7th; to sell USD 58bln 3yr notes on October 6th; to sell USD 22bln 30 year bonds on October 8th; all to settle on October 15th

• US sold 4-week bills at a high rate of 3.890%, B/C 2.83x; sold 8-week bills at 3.990%, B/C 2.70x
• US to sell USD 95bln 13-week bills and USD 82bln 26-week bills on October 5th; to sell USD 95bln of 6-week bills on October 6th; all to settle on October 8th

• Fed Hike Pricing via CME FedWatch: Oct 5.7bps (prev. 6bps), Dec 25.9bps (prev. 24.8bps)
• EFFR at 3.88% (prev. 3.88%), volumes at USD 120bln (prev. USD 83bln) on October 1st
• SOFR at 3.87% (prev. 3.90%), volumes at USD 3.067tln (prev. USD 3.23tln) on October 1st
• NY Fed RRP op demand at 1.051bln (prev. 0.35bln) across 3 counterparties (prev. 1) on October 2nd