U.S. Treasury bonds experienced a modest uptick on Tuesday, with yields declining across the curve. This move occurred despite volatile oil prices, which ultimately finished higher amid ongoing geopolitical tensions in the Middle East, driving some initial gains in yields that were later reversed. A strong auction of 3-year notes and shifting market indicators suggest a potential for a significant rally in Treasuries if upcoming July CPI data proves weaker than expected.

Just after 3:00 PM in New York, Treasury yields had generally fallen by 2 to 3 basis points, paring some of Monday's increase fueled by rising oil prices. WTI crude oil futures settled 1.3% higher, reaching a new monthly high after briefly surging by 3% during the session.

The U.S. Treasury Department successfully auctioned $58 billion in 3-year notes, marking the first coupon-bearing auction of the August-to-October financing quarter. The high yield was set at 4.291%, which was below the 4.296% level in the when-issued market just before the 1:00 PM deadline, indicating demand was slightly stronger than market expectations. This yield also represents the highest for this maturity since February 2025.

Overmight indexed swap (OIS) rates, which are tied to Federal Reserve meeting dates, moved lower. Contracts for 2027 now reflect roughly 3 basis points less in cumulative expected rate hikes over the coming months, although the market still fully prices in two 25-basis-point rate increases by mid-2027. In the short-term rate options market, capital flows continue to favor establishing new upside hedges while unwinding bearish put positions.

As of approximately 3:25 PM Eastern Time, the 2-year Treasury yield was at 4.22%, the 5-year yield at 4.3906%, the 10-year yield at 4.6904%, and the 30-year yield at 5.2413%. The spread between the 2-year and 10-year yields stood at 46.83 basis points, while the spread between the 5-year and 30-year yields was 84.9 basis points.