TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 7 TICKS LOWER AT 108-13+

The Treasury curve continued to bear flatten on Wednesday as escalating geopolitical tensions pushed oil prices higher, reinforcing expectations for further Fed tightening. At settlement, 2-year +4.1bps at 4.302%, 3-year +4.1bps at 4.342%, 5-year +3.9bps at 4.407%, 7-year +3.4bps at 4.528%, 10-year +3.3bps at 4.659%, 20-year +2.7bps at 5.171%, 30-year +1.8bps at 5.149%.THE DAY: It was more of the same on Wednesday during an otherwise quiet week for US data, with markets remaining firmly focused on developments in the Middle East. The conflict between the US and Iran continued to escalate, with both sides dismissing reports that negotiations were ongoing.President Trump warned that if Iran were to fire at a vessel in the Strait of Hormuz, the US would respond by bombing and destroying a bridge or power plant. Iran responded by threatening energy infrastructure across the region, keeping geopolitical tensions elevated.The increasingly escalatory rhetoric pushed crude prices higher, with WTI climbing back above USD 86/bbl and Brent above USD 93/bbl. Similar to Tuesday, the rise in oil prices fuelled inflation concerns and prompted money markets to increase expectations for further Fed tightening. Around 8.5bps of tightening are now priced for next week's FOMC meeting, implying roughly a 34% probability of a 25bp hike. By year-end, markets price around 35bps of cumulative tightening, fully pricing one rate hike with around a 40% probability of a second.Elsewhere, the USD 13bln 20-year Treasury auction was soft, with the issue tailing by 0.5bps and dealers left with a larger-than-average allocation. The results suggest the renewed geopolitical tensions may have tempered investor appetite for duration despite the 20-year yield trading at its highest level since May.SUPPLYNotes US sold 13bln of 20yr bonds; Tail 0.5bps. US to sell USD 21bln of 10-year tips on July 23rd; to settle on July 31st Bills US sold 17-week bills at a high rate of 3.845%, B/C 2.76x US to sell USD 110bln in 4-week bills and USD 100bln of 8-week bills on July 23rd; to settle July 28th STIRS / OPERATIONS Fed Pricing: 35.6bps (prev. Dec 31.9bps) EFFR at 3.63% (prev. 3.63%), volumes at USD 106bln (prev. USD 106bln) on July 21st SOFR at 3.61% (prev. 3.57%), volumes at USD 2.975tln (prev. USD 3.012tln) on July 21st NY Fed RRP op demand at 0.38bln (prev. 0.28bln) across 2 counterparties (prev. 1) on July 22nd NY Fed T-Bill Purchases (4-12 month): Accepts USD 3.45bln of USD 44.15bln offered; Offer-to-cover 12.79x