U.S. Treasuries pared some losses late Monday but short-term yields still rose by as much as 8 basis points during the session, primarily driven by escalating conflict in the Strait of Hormuz pushing oil prices higher. Subsequently, SOFR futures faced selling pressure, with heavy volume in the March and June 2027 contracts, which underperformed as the market began actively pricing in premium for interest rate hikes next year.
Shortly after 3 p.m. New York time, U.S. Treasury yields were up 6 to 8 basis points across the curve, with the yield curve flattening in a bearish trend. The yield spread between the 2-year and 10-year Treasuries narrowed by 1 basis point, while the spread between the 5-year and 30-year Treasuries contracted by 1.5 basis points. The yield on the 10-year U.S. Treasury note ultimately settled around 4.435%, after reaching an intraday high of 4.46%, its highest level since hitting the year's peak on March 27.
Overnight indexed swap (OIS) contracts tied to Federal Reserve meeting dates showed a significant shift towards pricing in more hawkish interest rate policy, with the market betting on approximately 17 basis points of rate hikes by the March and April Federal Open Market Committee meetings next year.
Reports that the United Arab Emirates' air defense systems responded to three missiles, with interception sounds heard in different parts of the country, accelerated the decline in short-term Treasuries during the U.S. morning session.
Futures trading volume increased. Trading volume in U.S. Treasury futures was about 30% higher than the 20-day average, while trading volume in SOFR futures from the September 2026 to December 2027 contracts was 20% to 60% above typical levels. As contracts priced in rate hike premium for the first half of next year, the day's fund flows appeared to indicate substantial demand for curve-steepening positions.
As of 3:36 p.m. New York time: - The 2-year Treasury yield was 3.95%; - The 5-year Treasury yield was 4.0828%; - The 10-year Treasury yield was 4.4372%; - The 30-year Treasury yield was 5.0178%; - The yield spread between 5-year and 30-year Treasuries was 93.32 basis points; - The yield spread between 2-year and 10-year Treasuries was 48.51 basis points.
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