US Treasury Market: Treasury Prices Hold Decline After Sharp Drop, Commodity Traders Buy on Dips

U.S. Treasury yields surged sharply, continuing the early session decline, with yields across all maturities generally rising by at least 10 basis points by the close on Friday. The morning weakness was mainly influenced by reports related to the Pentagon, which stated that three warships are being dispatched to the Middle East and thousands of Marines are being deployed. This move affected the interest rate markets and supported crude oil futures, while the sell-off in UK bonds intensified again.

Meanwhile, by midday, several large block trades near the intraday lows interrupted the ongoing sell-off, stabilizing price movements. Later, after CBS reported that Pentagon officials had made detailed preparations for deploying U.S. ground forces to Iran, longer-term yields declined again.

Toward the end of the session, U.S. Treasury yields surged sharply, with the entire yield curve rising by 10 to 16 basis points, and long-term yields approaching intraday highs. The 10-year U.S. Treasury yield rose about 14 basis points to 4.39%, and the 2s10s spread widened by 4 basis points.

In terms of policy pricing, the overnight index swap (OIS) rates corresponding to the Federal Reserve meeting indicate that markets expect about a 7 basis point rate hike by December, moving away from the intraday high — previously, markets had priced in roughly a 50% chance of a 25 basis point increase at the October FOMC meeting. Following reports of the deployment of Marines to the Middle East, market sentiment shifted further hawkish during the early U.S. session.

The aggressive selling in the early U.S. session attracted inverse trading demand, with two large block trades involving 10-year and 5-year U.S. Treasury futures totaling a risk weight of $2.45 million per DV01, aiming to set the 10-year yield at around 4.4% as a dividing line for this round of selling.

The dollar swap spreads came under pressure during the session, with rising interest rate volatility causing the long end to lead the decline. By the close, the 30-year spread approached its intraday low, narrowing by about 3 basis points.

As of 4:34 p.m. Eastern Time, the 2-year Treasury yield increased by 9.7 basis points to 3.8895%.

The 5-year Treasury yield rose by 12.3 basis points to 4.001%.

The 10-year Treasury yield increased by 13 basis points to 4.3796%.

The 30-year Treasury yield rose by 10.6 basis points to 4.9428%.

The 5-year and 30-year Treasury yield spread decreased by about 1.7 basis points to 94.01 basis points.

The 2-year and 10-year Treasury yield spread widened by approximately 3.1 basis points to 48.59 basis points.