Treasury demand cracks as oil tops $100 | Reuters Morning Bid

Today, the bond market is on edge as payrolls week collides with the end of the quarter. Plus, oil pushes further above $100 a barrel as President Trump rejects Iran's ceasefire proposals. And three more Fed members speak on Monday. Is the central bank as unanimous as it seems? This is Reuters Morning Bid, bringing you unfiltered market news and analysis straight from the Reuters newsroom. I'm Anna Shemansky in London. And I'm Mike Dolan. It's Monday, September 28th. Mike, last week was all about geopolitical talks and bonds. This week, we're getting a lot of economic data, and it's still completely unknown how the bond market is going to react. Let's unpack last week a little bit before we get into what's up ahead, because it was a dramatic week. There's no doubt for all that was happening at the UN. The big story for financial markets, obviously, was the bond market shakeout. And look at those levels where we're at now. From five years right out to 30 years, we're above 5%. The 30-year bond is above 5.5%. And they're all the kind of levels, certainly the long end, that are highest since before the great financial crash in 2007, 2008, right? So we're back at those levels, and we have almost 100 basis points of additional Fed tightening in the futures market. So what was behind that? I mean, look, we had a lot of pretty racy economic numbers. We had sort of the business surveys from early September, which really were well above forecast. And that wasn't just in the United States, it has to be said. We also had, of course, the rising oil price, another jump as the impasse between the United States and Iran continues, despite hopes that maybe the UN meeting might have had some breakthrough. It didn't happen. And this morning, we're looking at $108 or more on the Brent crude prices. So all those ingredients have been behind the point. But what was one incident, I think, that didn't get as reported as much as the others, which is that on Wednesday, there was a five-year treasury auction. And that went particularly badly. Now, the details of this get into the weeds of auctions, but essentially, there was a 3.1 basis point tail. Now, a tail is the difference between what everyone kind of is guided towards as the auction price or the yield on that auction, as opposed to what ultimately was demanded. And that was the highest, the second worst tail in auction history, right? So there is, the demand was its weakest since 2018. So there is here going forward, not just all of the economic and energy and geopolitical worries that are feeding into this bond price, there is increasingly an auction risk that may emerge as well. So every time we go to auction, there is this risk that it may not be exactly where it's guided. And speaking about non-fundamental issues, we also have the end of the quarter coming. Absolutely. And of course, that's often a technical thing, but it's an important thing, because certainly for mixed asset portfolios, when you get to the end of the quarter, there tends to be a rebalancing that happens. Now, sometimes people pass it away as a calendar event and it doesn't have any impact, but we have to watch it very carefully, given some of the seismic moves we've seen in bond markets. And also it's the half year for the Japanese fiscal year. And that's also kind of watched because of what's been happening in Japan, particularly in the Japanese bond markets. So often these end up with erratic moves, but we've got to be careful with that because they are also just ahead of the September employment report, which as always on a monthly basis is a very high impact data release. And speaking of, you touched on this earlier, but crude prices are up yet again on news that the potential for a ceasefire deal yet again between the US and Iran is off the table, at least it seems like for now. You have Tehran saying there needs to be a diplomatic solution, and you have the US saying at this point that they're willing to stand back. And you know, this is a story that has been going on and on. This is a sentence that I just said that really is a sentence I probably could have said many, many times in the last few months. So, you know, where are we as we look forward? We have the midterms coming up. Everyone thought that that was going to be this point that was going to almost essentially force there to be some type of resolution. And now that doesn't seem to be the case. But we had this idea at the end last week that the Iranians had a plan that they could reopen the Strait of Hormuz within seven days if there was a pullback to the United States, both on the economic and the shipping blockade. And so that seemed to be return us to the June Memorandum of Understanding, which would have left things slightly murkier. And it seems to have been dismissed out of hand by President Trump. So that leaves us with not much to grab onto, certainly not before the midterms. And I think certainly in terms of timelines for the market, unless there is a dramatic development from here, then we have to look to then before we would see any wind down of this. And, you know, we have to also look at what's happening on the ground. And there's there's no end to the various flashpoints in the whole region, not just in the Straits. Obviously, what's happening there on the ground is going to be top of mind for the Fed. As energy prices continue to be this major inflationary force, we get some more Fed members speaking this week, and it'll be really interesting to see whether they're all staying on script. Well, the Fed told us it was unanimous when it raised rates earlier this month. And of course, we don't have the minutes yet from that meeting. And those minutes will be very interesting. But unanimity surely means that everyone was agreed with what that decision was. But what we have seen, which is really interesting, since that meeting is all of the Fed members, even the ones that were slightly more dovish going into it, have all seemed to be speaking to the same script. They seem to be suggesting that the Fed agreed this hike. It also agreed that more may be necessary to get inflation back to target faster than it appears to be doing at the moment. So the extent to which that unanimity holds, not so much for the decision that was taken earlier this month, but going forward, will they all chime with the idea that more is necessary? That's going to be crucial for the October meeting coming up, because we're about two-thirds priced for another hike in October. For today's recommended read, check out Ron Bussow's column on how cash-rich oil majors are positioning themselves for a radically reshaped energy market. And for more of any of today's stories, head to Reuters.com or the Reuters app. Follow us on your favorite podcast player. And if you're on a smart speaker, just ask for the latest market news from Reuters. We'll be back tomorrow.