Notes for Tue, May 12, 2026

Iran/Hormuz bid plus hot core CPI risk plus four auctions into a Warsh handoff, we lean short the front end, fade belly rallies.

The take

We're not buying the dovish framing that's been carrying into this morning's tape. Three things have to clear before the front end can rally: tomorrow's core CPI, four auctions inside the next 48 hours, and a Powell-to-Warsh handoff Friday that nobody has a clean read on. Path of least resistance is higher front-end yields into Wednesday's tape.

A bull-flattener would also fit a growth-scare read on oil-as-demand-tax, but front-end OIS hasn't moved enough to confirm it. The view breaks if core prints sub-0.25% MoM or if Warsh's day-one messaging looks like status quo continuity. We're assuming Treasury holds the May refunding bill mix into the auction stops.

Oil, supply chain, CPI setup

Yesterday's print: 10yr +3.7bp at 4.39%^[1] on the Iran peace-talk impasse, with WTI +3% to $98^[2] after a second Qatar LNG tanker reversed course before Strait entry^[3] and an ADNOC tanker took damage^[4] off the coast. NY Fed has GSCPI 1.8 SD above mean^[5], petrochemical and helium shocks already showing up in input-cost data, with ASEAN exposure on memory and networking gear the under-priced vector for Q2 PPI.

The consensus inflation setup tomorrow is core CPI accelerating to +0.39% MoM on post-shutdown shelter catch-up^[6], with YoY tags 2.8%^[7]. China April CPI beat (1.2% vs 0.9%) and PPI surprise larger at 2.8% vs 1.8%^[8] sets the hawkish tone going into our print, not a direct read-across but it's another piece of upstream pressure the desk has to weigh. Goldman has pushed the last two cuts to Dec 2026 / Mar 2027^[9], and half the Street is now at zero cuts in '26^[10]. That's where terminal repricing is happening, not in the front-end visible to retail tape.

Auctions and funding

Four auctions in the window into a tape that's already given back duration. Specials are mild: 912797UN5 (Jul 7 bill) at 7.0 bp^[11] and 912797TX5 (Aug 20 bill) at 6.1 bp^[12] off the May 8 SOMA snapshot, that's supply-side warmth, not stress, and consistent with bills absorbing without forcing repo wider. Thursday May 7's SOFR is the freshest fix in inventory; Friday's and Monday's land at 9am, so we're trading without a clean read on month-start funding pressure for another two hours. TGA last marked May 6, we're carrying that as the funding anchor until next release.

If the morning bill auctions tail and concession builds into the coupon, the front end sells off into CPI. That's our base case. View flips if specials widen materially overnight or SOFR-IORB inverts again into mid-month.

Warsh and the credibility reset

Warsh inherits a 200+bp forward-guidance miss^[13], Fed talking cuts while the market prices hikes by mid-2027. Friday's first communication is, frankly, more important to the curve than tomorrow's CPI. We're sized for hawkish surprise rather than continuity; a clean tighter-for-longer signal day one drives the long end bid and craters near-term cut odds.

The pushback worth taking seriously: dealer gamma swung from record low to near record high^[14], which historically pins realized vol around the strike rather than amplifying directional moves. That's a reason to scale position size, not to flip the directional view. If we're wrong on Warsh and right on CPI, we still get paid on the front end; the cross-product is what we want.

Sources read

8 sources read

• Commentary items: 8

Citations

1. [1]10yr +3.7bp at 4.39% (10yr now +3.7bp at 4.39%, 2yr likely steeper) — Commentary · zerohedge.com
2. [2]WTI +3% to $98 (WTI up 3% to $98 on Trump's rejection of Iran's counterproposal) — Commentary · zerohedge.com
3. [3]second Qatar LNG tanker reversed course before Strait entry (second Qatar LNG tanker reversed course before Strait entry after first succeeded Sunday) — Commentary · zerohedge.com
4. [4]ADNOC tanker took damage (ADNOC tanker damaged by Iranian strike) — Commentary · zerohedge.com
5. [5]GSCPI 1.8 SD above mean (SOH closure has boosted Global Supply Chain Pressure Index to 1.8 SD above mean) — Commentary · libertystreeteconomics.newyorkfed.org
6. [6]core CPI accelerating to +0.39% MoM on post-shutdown shelter catch-up (April core CPI likely to accelerate to +0.39% MoM on shelter catch-up post-shutdown) — Commentary · zerohedge.com
7. [7]YoY tags 2.8% (core +0.39% MoM vs +0.2% prior; YoY accelerates to 2.8%) — Commentary · zerohedge.com
8. [8]China April CPI beat (1.2% vs 0.9%) and PPI surprise larger at 2.8% vs 1.8% (China's April CPI beat 1.2% vs 0.9% est; PPI surprise larger at 2.8% vs 1.8%) — Commentary · twitter.com
9. [9]Goldman has pushed the last two cuts to Dec 2026 / Mar 2027 (Goldman pushed final two cuts to Dec 2026/Mar 2027) — Commentary · zerohedge.com
10. [10]half the Street is now at zero cuts in '26 (now half the Street is forecasting zero cuts this year) — Commentary · twitter.com
11. [11]912797UN5 (Jul 7 bill) at 7.0 bp (912797UN5 (B 07/07/26) at 7.0 bp) — Observation · observation:seclend_observations:912797UN5:2026-05-08
12. [12]912797TX5 (Aug 20 bill) at 6.1 bp (912797TX5 (B 08/20/26) at 6.1 bp) — Observation · observation:seclend_observations:912797TX5:2026-05-08
13. [13]Warsh inherits a 200+bp forward-guidance miss (Warsh inherits a 200+bp forward-guidance miss: Fed talking cuts, market pricing hikes by mid-2027) — Commentary · twitter.com
14. [14]dealer gamma swung from record low to near record high (Dealer gamma swing from record low to near record high) — Commentary · twitter.com

Generated by Short Rates Desk. Informational only. Not investment advice.