TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 9 TICKS LOWER AT 107-20

US yields track oil prices higher as US-Iran strikes continue. At settlement, 2-year +4.6bps at 4.392%, 3-year +5.1bps at 4.458%, 5-year +4.9bps at 4.553%, 7-year +4.8bps at 4.665%, 10-year +4.0bps at 4.794%, 20-year +2.6bps at 5.270%, 30-year +1.7bps at 5.264%.

THE DAY: Treasuries were once again sold, with the yields on the short end and belly continuing to set new YTD highs. The move comes amid continued inflationary concerns due to higher oil prices amid firing in the Middle East. Today, Iran fired on tankers transiting the Strait of Hormuz, the US responded with fresh strikes on IRGC targets/radars near the Strait, and in turn, the Iranians fired back at the US. As it stands, the strikes are ongoing, with no signals from the US President of a preference for diplomacy: "I think an agreement with them isn't worth the paper it's written on," he said to Fox News. That said, Monday afternoon, Trump said the strikes would be limited, but today warned Iran will be ‘totally wiped out as a country’ if it retaliates and “if they do respond, they’ll be hit much harder”.

US data had resulted in a limited fixed-income reaction given the current geopolitical influence. ISM Manufacturing PMI fell short on the headline, weighed by declines in employment, new orders, inventories, and backlog of orders, with the prices component remaining sticky at elevated levels. At the same time, JOLTS fell short of forecasts, accompanied by a slight move lower in the quits rate and an unchanged vacancy rate.

Elsewhere, US Treasury Secretary Bessent said bond yields are showing that inflation expectations are flat to down. Meanwhile, we heard from Fed Governor Barr, who noted that if inflation doesn't moderate soon, it will be time for an interest rate hike, however, if confident inflation is moderating, he favours steady rates.

• US sold 6-wk bills at high-rate 3.735%, B/C 2.85x; sold 1-yr bills at high-rate 3.980%, B/C 3.61x
• US to sell USD 72bln of 17-wk bills on September 2nd; to sell USD 85bln of 8-wk bills and USD 90bln of 4-wk bills on September 3rd; all to settle Sept. 8th

• Fed Hike Pricing via CME FedWatch: Sept 17.1bps (prev. 16.5bps), Dec 39.4bps (prev. 37.4bps)
• EFFR at 3.63% (prev. 3.63%), volumes at USD 105bln (prev. USD 123bln) on August 31st
• SOFR at 3.68% (prev. 3.65%), volumes at USD 3.056tln (prev. USD 2.808tln) on August 31st
• NY Fed RRP op demand at 0.725bln (prev. 6.726bln) across 2 counterparties (prev. 4) on September 1st

An oil-driven selloff led by the front end and belly is the classic signature of a geopolitical supply shock: inflation risk reprices the policy path faster than growth risk reprices the long end, so the curve flattens on the way up, exactly as seen here with twos and fives making new cycle highs while the long bond barely moved. In past episodes of Middle East escalation, the treasury response has split cleanly by channel: the initial impulse runs through energy and breakevens, while duration itself attracts haven bids only if the conflict threatens broader risk assets or trade flows; sustained tanker disruption in the Strait is the variant that historically keeps the inflation leg dominant rather than the safe-haven leg. The soft ISM and JOLTS prints being ignored is also the established pattern when a live geopolitical tape overrides data, though that indifference tends to be temporary. Notable is the hike pricing edge higher alongside an official explicitly floating a hike conditional on inflation persistence, which marks a shift from the usual easing-bias framing and makes the front end the sensitive part of the curve. Worth watching is whether oil keeps the bid, any signal toward diplomacy from either side, and whether other Fed officials echo the conditional-hike language, since committee breadth rather than a single voice has historically determined whether such remarks reprice the path.