Bond Market Update

Four on the Floor

• U.S. Treasuries had a brutal day, with sharp losses and a spike in yields seen across the curve. There were four principal catalysts for today's weakness, which started to take root ahead of the cash session: 1) The preliminary September S&P Global U.S. Manufacturing and Services PMIs were much stronger than the prior month, reflecting an acceleration in business activity. That understanding stoked concerns that the Fed will move to institute more policy tightening. 2) Fed Governor Barr (FOMC voter) said in a speech that his baseline is that further policy adjustments will likely be needed. 3) The $70 billion 5-yr note auction was met with relatively weak dollar demand and relatively weak interest on the part of foreign buyers. 4) Crude oil futures traded higher today as a U.S.-Iran truce remained elusive. The 2-yr note yield traded as high as 4.94%, and the 10-yr note yield went as high as 5.13% before backing up a bit into the cash close. Consistent with the market's mindset, the probability of a 25-basis-point rate hike to 4.00-4.25% at the October FOMC meeting increased to 68.6% from 55.4% yesterday, according to the CME FedWatch Tool. With rates spiking and expectations for more policy tightening, the dollar ran strong against other major currencies. The U.S. Dollar Index was up 0.5% to 101.09.
• Yield Check:
  • 2-yr: +14 bps to 4.89%
  • 3-yr: +15 bps to 4.97%
  • 5-yr: +16 bps to 5.00%
  • 10-yr: +14 bps to 5.11%
  • 30-yr: +10 bps to 5.40%

• News:
  • The U.S. and Iran held talks. Iran presented conditions for reopening the Strait of Hormuz, including lifting the naval blockade, releasing frozen Iranian assets, and ending the war on all fronts. Axios
  • Several Republicans running for congressional and gubernatorial offices in 2026 are calling for an end to the Iran war. CNN
  • President Trump and Chinese President Xi both agree that AI development shouldn't be slowed. Bloomberg
  • Treasury Secretary Scott Bessent could get a second job as President Trump's AI Czar. Semafor
  • President Trump's Board of Peace will introduce a $2.45 billion Gaza recovery plan. Axios
  • Midwestern Republicans want President Trump to restrict diesel exports, but Republicans from energy states are urging the president not to do so. Politico
  • White House official calls Politico story on diesel export ban "fake news", according to updated Politico story
  • Treasury will purchase $6 bln in longer-dated bonds; Operation date: Tomorrow; Settlement Date: Friday
  • JPMorgan (JPM) considering using private credit to underwrite some credit card applications. WSJ
  • SoftBank (SFTBY) offering record yields on junk bonds. Bloomberg
  • Eurozone's September HCOB Manufacturing PMI 52.7 (expected 52.6; prior 52.7) and Services PMI 53.0 (expected 51.4; prior 51.6); Composite PMI 53.1 (expected 51.7; prior 52.0) 
• Today's Data:
  • September S&P Global U.S. Manufacturing PMI - Prelim 57.0 vs. 53.9 prior
  • September S&P Global U.S. Services PMI - Prelim 58.7 vs. 56.5 prior
  • $70 billion 5-yr note auction drew a high yield 5.033%; bid-to-cover 2.21 vs prior 12-auction average of 2.38
• Commodities:
  • WTI crude: +2.1% to $92.46/bbl
  • Gold: -1.3% to $4,318.00/ozt
  • Copper: -1.3% to $6.75/lb
• Currencies:
  • EUR/USD: -0.5% to 1.1386
  • GBP/USD: -0.8% to 1.3241
  • USD/CNH: +0.2% to 6.7109
  • USD/JPY: +0.6% to 158.26
• The Day Ahead:
  • 08:30 ET: Initial Jobless Claims (Briefing.com consensus: 202K; prior 196K) and Continuing Jobless Claims (prior 1730K)
  • 08:30 ET: Q2 Current Account Balance (Briefing.com consensus: -$221.0B; prior -$228.6B)
  • 10:00 ET: August New Home Sales (Briefing.com consensus: 610K; prior 607K)
  • 10:30 ET: EIA Natural Gas Inventories (prior +44 bcf)
  • 13:00 ET: $44 billion 7-yr note auction
  • Meeting between President Trump and President Xi