TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 13 TICKS HIGHER AT 108-27+

Treasury yields slide as oil prices drop. At settlement, 2-year -3.8bps at 4.200%, 3-year -4.8bps at 4.257%, 5-year -5.3bps at 4.353%, 7-year -6.4bps at 4.475%, 10-year -6.1bps at 4.639%, 20-year -5.1bps at 5.165%, 30-year -5.2bps at 5.175%. THE DAY: Treasury yields were lower across the curve on Tuesday, with the decline in oil prices supporting the move. Crude sold off on renewed US-Iran optimism after the NYT reported that the US is considering returning diplomats to Middle Eastern embassies as soon as this week, suggesting the Trump administration does not anticipate an imminent return to all-out hostilities. Meanwhile, Saudi Press reported that Pakistan Army Chief Munir conveyed a US offer to Iran to halt the siege and lift sanctions under the MoU in exchange for reopening the Strait of Hormuz and ending proxy attacks. The Treasury also sold USD 69bln of 2-year notes, with the 0.4bp stop-through, strong indirect participation and below-average dealer allocation pointing to healthy underlying demand, particularly given the lower outright yield on offer relative to July. The lower bid-to-cover and sharp decline in direct participation took some shine off the result, but the auction was still better than recent averages and suggested investors were willing to absorb the front-end supply despite the recent richening and lower yield on offer compared with July. Economic data ultimately had little impact. The Richmond Fed Manufacturing survey remained subdued, although the outlook was more encouraging. Meanwhile, Consumer Confidence showed greater optimism around the current situation but a softer outlook, resulting in a slightly weaker-than-expected headline print. There was also a Treasury buyback operation in the 5-7-year sector, which accepted just USD 1.19bln of the USD 8.4bln offered despite a maximum purchase amount of USD 4bln. This continues a similar theme seen in shorter-dated liquidity-support operations, where the Treasury has often purchased well below the maximum. In contrast, recent long-end operations have generally seen Treasury use the full USD 2bln capacity amid sizeable offers, helping explain the decision to increase long-end operation sizes to "at least" USD 4bln from September 9th. SUPPLY Notes/Bonds US sold USD 69bln of 2-year notes; Stop through 0.4bps. US to sell USD 70bln of 5-yr notes on Aug. 26th, and USD 44bln of 7-yr notes on Aug. 27th; all to settle on Aug. 31st US to sell USD 28bln of reopened 2yr FRN on Aug. 26th. Bills US sold 6-week bills at a high rate of 3.650%, B/C 2.71x US to sell USD 72bln in 17-wk bills on August 26th; to sell USD 100bln of 4-wk bills and USD 90bln of 8-wk bills on Aug. 27th; all to settle on Sept. 1st STIRS / OPERATIONS Fed Hike Pricing via CME FedWatch: Sept 10.0bps (prev. 10.4bps), 26.1bps (prev. 27.4bps).  EFFR at 3.63% (prev. 3.63%), volumes at USD 99bln (prev. USD 96bln) on August 24th SOFR at 3.65% (prev. 3.65%), volumes at USD 2.919tln (prev. USD 2.952tln) on August 24th * NY Fed RRP op demand at 0.41bln (prev. 0.38bln) across 6 counterparties (prev. 2) on August 25th * Treasury Buyback [5-7yr nominal coupons, max USD 4bln]: Accepts USD 1.191bln of USD 8.4bln offers, O/C 7.05x. Accepts 10 of 25 eligible securities.