As the dust settles on Thursday’s UST market action, it’s clear that bullish sentiment has lost some steam. Despite headlines suggesting a potential agreement on trade tensions, yields failed to rally significantly, instead trading sideways into the close. The curve ultimately flattened, with light European pension buying in the 10y-20y off-the-run sector contributing to the move. Inflation markets, meanwhile, have responded positively to improved sentiment, with gasoline futures retracing some of their recent losses and driving a steepening of the breakeven curve. However, elevated uncertainty continues to limit meaningful risk deployment, and medium-term forwards remain well anchored despite a soft auction in 10y TIPS.

The UST market saw little movement during the day, with yields ultimately finishing flat on the week. The curve flattened slightly, but the steepness of the long end remained intact. Flow-wise, the desk observed front-end risk squaring, while cheapening in real yields at the long end attracted buying interest. This helped 30y breakevens see improved performance on the curve, alongside continued demand for 5y basis. Inflation options (IOTAs) remained relatively tight, but the bid-to-cover ratio was lower than previously seen in the 10y TIPS auction.

In the TIPS market, the $19 billion 10y reopening auction tailed by nearly 2bp, stopping at a high yield of 2.169% – the highest level since May 2025. The bid-to-cover ratio was 2.52 (vs 2.38 prior), with softer indirect participation (61.4%) offset by a strong direct bid (27.5%). While the auction underwhelmed expectations, the broader TIPS backdrop remains constructive. Demand for longer-dated paper remains robust, and the recent pickup in inflation has helped improve sentiment in the market.

Overall, the UST curve appears to have lost some of its bullish momentum, while the TIPS auction failed to generate the kind of interest seen in recent months. Despite this, the broader TIPS landscape remains supportive, with inflation markets continuing to respond positively to improved sentiment. As investors continue to navigate a complex and uncertain environment, it’s clear that the UST and TIPS markets will remain closely watched for any signs of shift in market dynamics.