TREASURY WRAP: T-NOTE FUTURE SETTLE 31 TICKS LOWER AT 105-01

Yields rally after hawkish PMI data, Fed speak and a woeful 5-year auction while global bonds hit on potential US diesel export ban. At settlement, 2-year +15.0bps at 4.897%, 3-year +16.0bps at 4.970%, 5-year +17.0bps at 4.997%, 7-year +16.7bps at 5.051%, 10-year +15.3bps at 5.108%, 20-year +12.6bps at 5.459%, 30-year +10.3bps at 5.398%. THE DAY: The Treasury market crumbled on Wednesday, with yields surging across the curve and some maturities rising around 20bps at the peak of the move. There were several drivers behind the price action. From the US, the S&P Global Flash PMI data was strong across the board, with Manufacturing rising to 57.0 from 53.9, above the 53.6 forecast, while Services rose to 58.7 from 56.5, above the 56.0 forecast, taking the Composite to 58.4 from 56.0. Importantly for the rates market, the report noted that input costs surged on the back of higher energy prices, with firms' input costs rising at the steepest rate for four years, adding further upward pressure on selling prices and inflation in the coming months. Hawkish Fed speak continued, with Fed Governor Barr noting that further rate hikes are likely needed to ensure a timely return to the 2% inflation target. Barr said inflation is not trending towards target in a timely manner, while economic growth remains strong and the labour market is solid. The 5-year auction was very weak. The sizeable 3.1bp tail — the second-largest on record — weak bid-to-cover, sharp deterioration in indirect demand and elevated dealer allocation pointed to a very poor reception. Direct demand was strong, but was nowhere near enough to offset the weakness elsewhere. Most notably, the auction struggled despite offering a substantial increase in outright yield versus August, suggesting the significant cheapening was insufficient to entice broader end-user demand. There was also mixed reporting regarding a potential US diesel export ban after Trump said on Tuesday that the administration was examining the idea. Fears of a diesel export ban likely added to pressure on bonds. While restricting exports could lower domestic diesel prices, it could also push US gasoline prices higher, while removing diesel supply from global markets could raise fuel prices abroad, adding to broader inflation concerns. Global bonds were also heavily sold amid the developments, likely adding to the pressure on Treasuries. The combination of strong and inflationary PMI data, hawkish Fed speak, concerns surrounding a potential diesel export ban and a very weak 5-year auction created a potent mix for Treasuries to tumble on Wednesday. However, T-notes pared some of their losses after a White House official denied a Politico report that the US was considering a 90-day diesel export ban. At the extremes of the move, the entire curve aside from the 2-year traded above 5%, with the 2-year reaching around 4.94%. The Treasury also announced a maximum size of USD 6bln for Thursday's 20-30yr bond buyback operation, matching the 10-20yr sector and in line with expectations from analysts at Wrightson. The announcement had little impact on price action. Supply Notes US sold USD 70bln of 5yr notes: Tail 3.1bps US sold USD 28bln of 2-year FRN's; met with weak demand. US to sell USD 44bln of 7yr notes on September 24th. Bills US sold 17-week bills at a high rate of 4.135%, B/C 2.81x US to sell USD 90bln of 4-week bills and USD 84bln of 8-week bills on Sept 24th STIRS / OPERATIONS Fed Hike Pricing via CME FedWatch: Oct 17.7bps (prev. 13.9bps), Dec 37.1bps (prev. 33bps). EFFR at 3.88% (prev. 3.88%), volumes at USD 103bln (prev. USD 95bln) on September 22nd SOFR at 3.87% (prev. 3.85%), volumes at USD 2.94tln (prev. USD 2.912tln) on September 22nd NY Fed RRP op demand at 0.46bln (prev. 0.45bln) across 4 counterparties (prev. 8) on September 23rd