US long-dated Treasuries drifted lower on Tuesday afternoon, as weaker-than-expected demand at the 20-year note sale and rising crude prices offset an earlier surge that pushed yields to multi-year highs. The day's peak yields, including the 10-year hitting its highest level since 2007, were reached before the start of US trading hours, with gains in the 10- to 30-year sector later paring to just 1-2 basis points.

This pullback occurred despite WTI crude futures settling 4.4% higher at their strongest level since mid-May. In the rates options market, hedging demand intensified ahead of Wednesday's Federal Reserve decision, with swap markets almost fully pricing in a 25-basis-point rate hike. Just after 3 PM in New York, the 10-year yield retreated below the 5% mark after having climbed to 5.04% earlier in the session, while shorter-dated yields remained largely unchanged. The 2s10s and 5s30s yield curve spreads widened by roughly 1 and 2 basis points, respectively.

Where to begin

Traders positioned for the possibility that the Fed might hold rates steady, driving upside hedging demand in short-term rate contracts. The market is currently pricing in approximately 23 basis points of tightening. Flows included direct purchases of deep out-of-the-money call options for October and November expiry.

Adding to the steepening pressure in the US afternoon session, the $13 billion 20-year Treasury reopening was awarded at a yield 2 basis points above pre-auction levels. The bid-to-cover ratio was soft, with primary dealers taking down 16.9% of the supply—the highest allocation since February—while indirect bidders absorbed 52.5% and direct bidders 30.7%.

For a third consecutive session, the market saw demand for shorting the June 2027 SOFR straddle, a trade that has now collected roughly $150 million in total premiums. As of 4:32 PM ET, the 2-year yield was up 1.6 basis points at 4.6734%, the 5-year yield gained 1.5 basis points to 4.8368%, and the 10-year yield rose 1.7 basis points to 5.004%. The 30-year yield added 2.2 basis points to 5.3662%. The 5s30s spread widened about 0.7 basis points to 52.76, while the 2s10s spread increased roughly 0.3 basis points to 32.85.