US Treasury Market: Rising Oil Prices Push Bonds Lower, Dollar Swap Spreads Widen

US Treasuries fell in early US trading as oil prices climbed and dollar swap spreads widened sharply.

Although reports later emerged that US President Trump was willing to ease sanctions on Iran if "concrete progress" were made on the nuclear issue, causing oil's rally to fade, Treasuries largely held their intraday losses through the afternoon US session.

As Treasuries declined in the morning, swap spreads widened significantly, indicating flows conducting negative convexity hedging by paying fixed rates in the swap market, with long-end spreads briefly reaching their widest since late January.

Just after 3pm New York time, Treasury yields pulled back from their intraday highs but remained 7 to 9 basis points higher across the curve, with the belly the weakest performer, and the 2s5s30s fly widening nearly 3 basis points on the day.

The 10-year US Treasury yield stood around 5.245%, up 8.5 basis points on the day, having briefly risen above 5.27% during the session.

Oil drove the early decline in Treasuries after Trump rejected Iran's latest proposal to reopen the Strait of Hormuz.

As oil's rally gradually faded during the US session, yields also retreated from their intraday highs.

In early New York trading, long-end dollar swap spreads rose by about 2 basis points, showing that flows conducting negative convexity hedging by paying fixed rates in the swap market intensified the decline in the US fixed income market.

The 30-year swap spread briefly rose to about negative 66 basis points, the highest level since late January, and closed at its intraday high.

As of 4:23pm New York time, the 2-year Treasury yield rose 7.3 basis points to 4.9243%.

The 5-year Treasury yield rose 7.9 basis points to 5.0662%.

The 10-year Treasury yield rose 6.9 basis points to 5.2298%.

The 30-year Treasury yield rose 5.6 basis points to 5.5466%.

The spread between 5-year and 30-year Treasury yields narrowed by about 2.1 basis points to 47.86 basis points.

The spread between 2-year and 10-year Treasury yields narrowed by about 0.3 basis points to 30.34 basis points.