TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE UNCHANGED AT 104-27+

Yield curve steepens on US/Iran diplomatic optimism ahead of key week for US data. At settlement, 2-year -6.9bps at 4.862%, 3-year -6.6bps at 4.946%, 5-year -5.9bps at 5.007%, 7-year -3.9bps at 5.094%, 10-year -2.5bps at 5.183%, 20-year +0.6bps at 5.566%, 30-year +1.6bps at 5.505%.

THE DAY: The yield curve steepened on Friday, with front-end yields declining while long-end yields rose. The front end tracked energy prices lower, with crude settling in the red on further hopes for diplomacy between the US and Iran. CBS reported that talks have entered a technical phase, with Iran describing the atmosphere as increasingly positive. Meanwhile, Al Arabiya said a return to the MoU is possible, with positive indications from both sides and any arrangements likely to be phased in if an agreement is reached.

While the front end benefited from lower energy prices and associated inflation concerns, long-end yields moved higher, potentially reflecting reduced geopolitical risk and improved growth expectations as hopes build for some form of agreement between the US and Iran. However, into settlement, T-note futures ticked higher across the curve, perhaps reflecting some month-end positioning. Bloomberg estimates the US Treasury duration extension for Oct. 1 at 0.07yrs, in line with the 10-year October average and above last year's 0.06yrs, albeit below the 12-month average of 0.08yrs.

Elsewhere, August Durable Goods beat expectations; although unchanged M/M, it was above the -0.4% forecast. Ex-transport missed expectations, while the ex-aircraft component saw a strong beat. Following the data, the Atlanta Fed's Q3 GDPNow estimate was revised marginally lower to 5.0% from 5.1%, but continues to point to strong growth. The final September UoM report saw sentiment improve from the preliminary reading, although it remained below August levels, with both current conditions and expectations revised higher. Inflation expectations were unchanged from the preliminary release.

Fed speak saw Hammack, Schmid and Williams reiterate concerns around inflation. Williams acknowledged that tariffs generally do not produce sustained inflation, while Schmid said the inflation problem has not yet been solved. Hammack also highlighted concerns around demand-related inflation pressures.

Looking ahead, attention turns to next week's ISM Manufacturing PMI, PCE and NFP reports for further evidence on whether the strong growth, elevated inflation and solid labour market narrative remains intact. However, Warsh has stressed his preference for looking at trends in the data rather than placing too much weight on any single month's release.

Supply

Bills

• 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 16.6bps (prev. 17.7bps), Dec 36.5bps (prev. 38bps)
• EFFR at 3.88% (prev. 3.88%), volumes at USD 105bln (prev. USD 101bln) on September 24th
• SOFR at 3.88% (prev. 3.87%), volumes at USD 2.99tln (prev. USD 2.946tln) on September 24th
• NY Fed RRP op demand at 0.58bln (prev. 0.63bln) across 3 counterparties (prev. 3) on September 25th