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

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.