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TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLES 23 TICKS LOWER AT 106-11+

An oil-driven bear flattening of this shape is a familiar pattern: a supply-side crude shock lifts inflation expectations, the market prices a more restrictive policy path, and the front end sells off harder than the long end because near-term rate risk sits in the 2-year while term-premium dynamics anchor the back.

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TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLES 23 TICKS LOWER AT 106-11+

US FX WRAP: Dollar tracks yields and oil higher

Saudi Civil Defense says the danger has passed in Khamis Mushait Governorate and Abha

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Treasury yields rally, particularly in the front end, as oil advances on escalating Middle East tensions. At settlement, 2-year +12.9bps at 4.565%, 3-year +13.3bps at 4.663%, 5-year +12.6bps at 4.746%, 7-year +12.1bps at 4.847%, 10-year +11.2bps at 4.957%, 20-year +9.5bps at 5.391%, 30-year +8.0bps at 5.373%.

THE DAY: The Treasury curve bear flattened on Thursday, led by the front end as inflation concerns intensified alongside another surge in crude prices.

WTI rallied back above USD 100/bbl, with the latest upside occurring amid an escalating situation around the Bab al-Mandeb Strait. Reports throughout the morning suggested that the Houthis are close to gaining complete control of the Strait after taking control of the city of Al Mukha. Reports also suggested they are taking control of Zaqar Island, Mayun Island and the Al-Omair military and strategic base, which overlooks the Strait.

The surge in oil prices reignited inflation concerns and drove a pronounced sell-off at the front end, with the 2-year yield rising around 13bps to c. 4.57%, while the 30-year yield rose around 8bps to 5.37%. The latter marked its highest level since 2007 and returned the long-end yield to around the levels seen when Treasury announced it would at least double the size of its long-end buyback operations.

The 30-year bond auction was very strong. The 2.7bp stop-through, significantly above-average bid-to-cover, exceptional indirect demand and extremely low dealer allocation point to a very strong reception, likely supported by the historically elevated outright yield.

The 10-20yr buyback operation didn’t see a notable reaction (details below).

Elsewhere, the US PPI report was mixed but broadly in line overall. Headline PPI rose 0.4% M/M, in line with the consensus and accelerating from the prior 0.1% increase (revised from 0.0%), while the Y/Y rate accelerated to 5.4%, above the 5.3% forecast and prior 4.8%. The core metrics were more encouraging, with core PPI rising 0.2% M/M, below the 0.3% forecast and prior, while the Y/Y rate rose to 4.6%, in line with expectations but accelerating from 4.3%.

Meanwhile, the ECB hiked rates by 25bps as expected in a unanimous decision and maintained its non-committal guidance. Meanwhile, its 2027 HICP inflation forecast was raised, although the projection was lower than some desks had expected. Later sources suggested further tightening is likely, with an October hike in play.

SUPPLY

Notes

  • US sold USD 22bln of 30-bonds;
  • US to sell USD 13bln of 20yr bonds on September 15th; to settle on Sept. 18th; to sell USD 19bln of 10yr TIPS on Sept. 17th; to settle on Sept. 30th

Bills

  • US sold 4-week bills at a high rate of 3.775%, B/C 2.81x; sold 8-week bills at a high rate of 3.845%, B/C 2.82x
  • US to sell USD 92bln of 13-wk bills and USD 79bln of 26-wk bills on Sept. 14th, to sell USD 75bln of 6-wk bills on Sept. 15th.

STIRS / OPERATIONS

  • Fed Hike Pricing via CME FedWatch: Sept. 17.5bps (prev. 15.3bps), Dec 41.7bps (prev. 36.7bps)
  • EFFR at 3.63% (prev. 3.63%), volumes at USD 110bln (prev. USD 107bln) on September 9th.
  • SOFR at 3.64% (prev. 3.64%), volumes at USD 2.859tln (prev. USD 2.904tln) on September 9th.
  • NY Fed RRP op demand at 4.736bln (prev. 0.432bln) across 4 counterparties (prev. 6) on September 10th.
  • Treasury Buyback [Liquidity Support, 10yr-20yr, max USD 6bln]: Accepts USD 5.187bln of 10.489bln offered, accepts 23 of 40 eligible securities. Offer to cover 2.022x.
Context

The Bab al-Mandeb angle matters through a specific channel, freight and insurance costs on rerouted shipping feeding goods inflation with a lag, and chokepoint episodes of this kind have historically produced an initial crude spike that fades unless physical supply is actually interrupted rather than merely rerouted. The tension in this tape is worth noting: a very strong 30-year auction with heavy indirect demand at an outright yield at multi-decade highs shows duration buyers emerging at levels, even as the front end capitulates, a split that in past episodes has marked the difference between a temporary inflation scare and a genuine repricing of the terminal rate. The ECB hike and raised inflation forecast reinforce a global tightening impulse that has historically spilled into US front-end pricing through the policy-rate differential rather than through the long end. The follow-ons are whether crude holds its gains or retraces on confirmation that shipping flows continue, the incoming inflation prints that now carry outsized weight given the oil backdrop, and whether Fed speakers validate the added hike pricing in the September and December contracts. Auction demand of that strength at the long end also sets up the next duration supply as the tell for whether elevated yields keep drawing real-money bids.

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