The US Treasury yield curve underwent a significant bull steepening on Thursday, with short-dated bonds leading the gains, supported by risk spillover from the European bond market and the resulting safe-haven buying; the spread between French government bonds and German government bonds became the focal point of the European market.

Alongside the Treasury rally, US dollar swap spreads narrowed substantially, indicating the presence of fixed-rate receiving flows while fixed-rate paying positions were being unwound. Additionally, significant flows emerged in SOFR futures trading and in trades relative to federal funds futures during the day.

Shortly after 3 PM New York time, Treasury yields across the curve fell by 2 to 10 basis points, with the short end leading the advance, pushing the 2-year/10-year and 5-year/30-year yield spreads wider by 5.5 basis points and 6 basis points respectively on the day, both closing slightly below their intraday highs.

Short-end buying pushed rate hike premiums lower, with the swap market implying only 7 basis points of tightening in October, down from 10 basis points at Wednesday's close. Most of the day's gains occurred during the mid-morning US trading session, accompanied by narrowing swap spreads.

Meanwhile, euro area government bond risk premiums surged, with the spread between Italian and German 2-year government bond yields nearly doubling to 55 basis points, and risk indicators for French government bonds also rose.

Reports indicated that the US deployed up to 10,000 additional troops to the Middle East, and that US President Trump recently told aides he expects to resume bombing operations against Iran. Following the news, Treasury gains were slightly pared back, and WTI futures subsequently surged to their intraday high.

During the morning US trading session, the early bear steepening move extended further following the release of September ISM data. The prices paid component of the data was notably stronger than expected.

In SOFR options, a notable trade during the day was a March call spread position, targeting a bet that the Federal Reserve will not raise rates at upcoming meetings. By the end of the trading day, the trade had reached a size of up to 100,000 options contracts.