Notes for Tue, Jul 28, 2026

Ceasefire pause held and oil cracked below $90, but 2s kept their hawkish premium into Warsh; we fade Wednesday's 38% hike.

Into Wednesday

The Fed decides tomorrow and the market can't call it: SOFR futures put roughly a 38% chance on a hike^[1], rare this close to a decision. Our base case is a hawkish hold and we'd fade the hike, not the premium behind it. The 2Y sits at 4.33%^[2], 70bp above the 3.63% effective^[3] and through the top of the 3.50-3.75% target range^[4]. That is not a market waiting on a coin flip; it is one pricing higher-for-longer and a real chance new Chair Warsh leans hawk^[5].

Last night's record carried a single assumption, the ceasefire pause holds into the decision, and it held: the US stood down a third straight night and Brent cracked below $90^[6]. No break test on the books tripped, so the call rides. Today doesn't flip the record, it extends it: we keep the front-end premium on and aren't buying 2s into the print.

The event is two-sided and we're keeping both tails. Hawkish: a hike, or dissents from Logan and Hammack pushing for one now^[7]. Dovish: a clean hold that reads as finished and lets 2s rally hard. The Fed is in blackout^[8], so no steer lands before the statement.

Oil relief, not a Fed pivot

Don't read the overnight move as a Fed pivot. Brent fell 9% toward $88 and the 10Y richened about 4bp to 4.64%^[9], off Friday's 4.69%^[10], as the strikes paused. If this were the front end repricing the Fed, 2s would have rallied with the long end. They didn't, the 2Y held its premium while the belly and long end took the oil relief. So the front-end cheapness is about the path and Warsh, not the Iran tail; the oil move trims the inflation tail without touching the hike question.

We're wrong on the hold if the FOMC hikes Wednesday or Warsh guides to September, then the front end was cheap, not rich, and our 2Y range breaks. We re-baseline if the ceasefire fails and Brent retakes $100, which re-arms the inflation tail the long end just discounted. The call assumes month-end funding stays orderly, and with the RRP all but empty that cushion is thin.

The 2s/5s split

Monday's supply drew the split cleanly. The $69bn 2Y stopped through and priced 4.315%^[11], its strongest bid since January; the $70bn 5Y tailed for a 14th straight time on a 2.28 bid-to-cover, the weakest in almost five years^[12]. Same afternoon, three years apart, opposite outcomes: near-dated paper is well bid at these yields while the belly is where the inflation-risk premium is stacking up, with the cash 5Y at 4.43%^[13]. The 4.125% June-2031 note backs it, financing special at a 17.6bp SOMA lending fee^[14], a short base in a sector that just cheapened. We'd rather be paid in the belly than the front here.

Funding: calm into the turn

Funding is calm and we're leaving it alone. SOFR fixed 3.64% Friday^[15], a basis point under the 3.65% IORB^[16], with GCF UST at 3.67% Monday^[17], no pressure in the plumbing. The RRP is effectively empty at $1.4bn^[18], so cash is fully deployed, but SOFR printing below IORB says ample-not-scarce, not stress. Reserves drained $81bn on the week^[19] to $3.06tn^[20], seasonal tax-and-settlement drag, not a warning. The one watch is the 7/31 turn: with no RRP buffer a month-end pop above IORB is the risk, though the repo curve is flat^[21] and isn't flagging one yet.

Sources read

4 sources read

• Commentary items: 4

Citations

1. [1]roughly a 38% chance on a hike (SOFR futures ~38% hike probability priced into Wednesday's FOMC) — Commentary · zerohedge.com
2. [2]The 2Y sits at 4.33% (4.33) — FRED DGS2 · Jul 24, 2026
3. [3]3.63% effective (3.63000%) — NY Fed EFFR · Jul 24, 2026
4. [4]3.50-3.75% target range (3.50 lower / 3.75 upper (DFEDTARL/DFEDTARU 2026-07-27)) — FRED DFEDTARL · Jul 27, 2026
5. [5]new Chair Warsh leans hawk (notes market debate over whether new Chair Warsh might surprise with a hike) — Commentary · zerohedge.com
6. [6]the US stood down a third straight night and Brent cracked below $90 (US paused strikes a third straight night; Brent fell ~9% to around $88 a barrel) — Commentary · zerohedge.com
7. [7]dissents from Logan and Hammack pushing for one now (possibly Dallas Fed President Lorie Logan and Cleveland's Beth Hammack - who favor a rate increase now) — Commentary · zerohedge.com
8. [8]The Fed is in blackout (the Fed's external communications blackout continues ahead of the decision) — Commentary · zerohedge.com
9. [9]the 10Y richened about 4bp to 4.64% (bond yields fell; 10Y about 4bp lower to 4.64% as strikes paused) — Commentary · zerohedge.com
10. [10]off Friday's 4.69% (4.69) — FRED DGS10 · Jul 24, 2026
11. [11]The $69bn 2Y stopped through and priced 4.315% (priced at a high yield of 4.315%... third stop through in a row) — Commentary · zerohedge.com
12. [12]the $70bn 5Y tailed for a 14th straight time on a 2.28 bid-to-cover, the weakest in almost five years (bid to cover dropped to 2.282, the lowest in almost 5 years) — Commentary · zerohedge.com
13. [13]the cash 5Y at 4.43% (4.43) — FRED DGS5 · Jul 24, 2026
14. [14]17.6bp SOMA lending fee (17.6 bp) — Observation · observation:seclend_observations:91282CQX2:2026-07-27
15. [15]SOFR fixed 3.64% Friday (3.64000%) — NY Fed SOFR · Jul 24, 2026
16. [16]3.65% IORB (3.65000000) — FRED IORB · Jul 28, 2026
17. [17]GCF UST at 3.67% Monday (UST 3.66500 / MBS 3.68200) — DTCC GCF repo · Jul 27, 2026
18. [18]effectively empty at $1.4bn (1.38000000) — FRED RRPONTSYD · Jul 27, 2026
19. [19]drained $81bn on the week (-80,572M w/w) — FRED WRESBAL · Jul 22, 2026
20. [20]to $3.06tn (3,062,149M) — FRED WRESBAL · Jul 22, 2026
21. [21]the repo curve is flat (repo curve flat; SRP-IORB spread at -1bps, banks not lending excess cash) — Commentary · conks.plumbing

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

Both ends sit repriced higher into tomorrow's FOMC. We fade the priced hike but keep front-end premium; the September tail is the real risk.

The call into the decision

We carry this morning's stance into the close unchanged: fade the hike the market has priced for Wednesday, keep the front-end premium further out. Pricing is a genuine coin-flip, hike odds quoted at 36% mid-session^[1] and as high as 45% earlier^[2], and that width is historically extreme, with only 3 of 135 post-crisis meetings landing in the 33 - 66% band before a decision^[3].

The front end is not pricing 'nothing.' The 2Y at 4.33^[4] sits 58bp above the top of the 3.50 - 3.75 target range^[5], so the market carries a full path of no cuts plus a hike tail, not just Wednesday's meeting. A hike tomorrow against a benign June core would be a communication shock, so a hold is base case and the bigger asymmetry is a dovish unwind of the ~10bp of meeting premium in the front contracts. Robin Brooks called it plainly, 40% odds on a 25bp hike is 'nuts'^[6] with June core that well-behaved. What we keep is the premium further out the reds, where Waller's hawkish pivot^[7] and Cook's September optionality^[8] keep a hike tail alive into the autumn.

Both ends moved

The dominant move is still the long end. 30Y at 5.16^[9] is a cycle high, up from 4.86 in late June^[10]; 10Y at 4.69^[11]. The 10Y model term premium sits at 0.78^[12], near its recent highs, and 30Y swap spreads blew out from 75 to 100bp in days^[13] as hedge funds became the marginal buyer against balance-sheet-constrained banks. We read the long end as term premium and supply absorption, not a Fed repricing, and Robin Brooks' cut, that 10Y has risen less than 2Y^[14], says the same: this is near-term path, not a fresh fiscal risk premium.

But the front end moved too, 2Y up from 4.13 in mid-July^[15], so a clean 'term premium, not Fed' framing is wrong here. Both ends have repriced a higher path. That is why we split the trade: fade the meeting, hold the path.

Break tests: ceasefire held, Brent short of $100

One break test was on the books: re-baseline if the ceasefire fails and Brent retakes $100, re-arming the inflation tail the long end discounted. It did not trip. Oil cut both ways today, blockade-reinstatement chatter^[17] against US - Iran deal talk, but Brent stayed short of $100, softening week-to-date on the negotiations^[16]. The call rides.

Funding calm into the turn

Funding is orderly into month-end. SOFR at 3.64^[18] prints a basis point below IORB at 3.65^[19], and GC repo on Treasury collateral at 3.665^[20], no scarcity signal. Reserves fell to 3.06T^[21], down about 81bn on the week, and the TGA rebuilt to 835bn^[22], so the cushion into the turn is thinner but not stressed. Skyrm has the 7/31 - 8/3 turn quoted 3.80/3.78 against prior fills of 3.75/3.74^[23], a modest turn premium, fairly priced. This morning's assumption that month-end stays orderly holds.

Positioning and what breaks us

Into the decision: receive the meeting to fade the ~10bp of hike premium, keep front-end premium in the reds for the September tail. We're wrong on the meeting leg if the statement delivers a hike, or a hold hawkish enough to validate September, 2Y and front OIS reprice up, not down. The path leg assumes the long-end selloff is supply and term premium, not the leading edge of a credible hawkish-Warsh reaction-function shift; if the presser confirms that shift, the whole curve bear-flattens and the fade is offside. We re-baseline if the ceasefire fails and Brent retakes $100. And it assumes the 7/31 turn stays orderly, if funding gaps well beyond the 3.80 print, the thinner reserve cushion bites the front end first.

Sources read

4 sources read

• Commentary items: 4

Citations

1. [1]36% mid-session (Market pricing 36% hike probability into July 29 meeting, a sharp shift) — Commentary · twitter.com
2. [2]as high as 45% earlier (Bianco flags 45% hike odds for end-July) — Commentary · twitter.com
3. [3]only 3 of 135 post-crisis meetings landing in the 33 - 66% band before a decision (only 3 of 135 post-GFC meetings landed in the 33 - 66% uncertainty band pre-decision) — Commentary · twitter.com
4. [4]The 2Y at 4.33 (4.33) — FRED DGS2 · Jul 24, 2026
5. [5]the 3.50 - 3.75 target range (3.50 - 3.75 (DFEDTARL 3.50 / DFEDTARU 3.75)) — FRED DFEDTARU · Jul 28, 2026
6. [6]40% odds on a 25bp hike is 'nuts' (they put a 40 percent probability on a 25 basis point hike for this Wednesday. That's nuts because core CPI inflation for June was extremely well behaved) — Commentary · robinjbrooks.substack.com
7. [7]Waller's hawkish pivot (Waller signals hiking bar is low and inflation-driven, not transitory-tariff driven) — Commentary · twitter.com
8. [8]Cook's September optionality (July hold now, but hiking bias intact if the data doesn't cooperate) — Commentary · twitter.com
9. [9]30Y at 5.16 (5.16) — FRED DGS30 · Jul 24, 2026
10. [10]up from 4.86 in late June (4.86) — FRED DGS30 · Jun 29, 2026
11. [11]10Y at 4.69 (4.69) — FRED DGS10 · Jul 24, 2026
12. [12]term premium sits at 0.78 (0.7787) — FRED THREEFYTP10 · Jul 17, 2026
13. [13]30Y swap spreads blew out from 75 to 100bp in days (30yr swap spread blew out 25bp to 100bp in days) — Commentary · twitter.com
14. [14]10Y has risen less than 2Y (10-year yields have risen less than 2-year yields, suggesting markets are not yet pricing significant fiscal risk premiums) — Commentary · robinjbrooks.substack.com
15. [15]2Y up from 4.13 in mid-July (4.13) — FRED DGS2 · Jul 15, 2026
16. [16]softening week-to-date on the negotiations (Oil collapse (Brent -$14/bbl week-to-date on US - Iran talks)) — Commentary · zerohedge.com
17. [17]blockade-reinstatement chatter (Hormuz blockade narrative cycling again, deal 'revival' hype amid zero tanker traffic) — Commentary · zerohedge.com
18. [18]SOFR at 3.64 (3.64) — NY Fed SOFR · Jul 27, 2026
19. [19]IORB at 3.65 (3.65) — FRED IORB · Jul 28, 2026
20. [20]GC repo on Treasury collateral at 3.665 (UST 3.66500) — DTCC GCF repo · Jul 27, 2026
21. [21]Reserves fell to 3.06T (3,062,149M) — FRED WRESBAL · Jul 22, 2026
22. [22]the TGA rebuilt to 835bn (835,417M) — Treasury General Account · Jul 22, 2026
23. [23]quoted 3.80/3.78 against prior fills of 3.75/3.74 (quoted 3.80/3.78 with prior fills at 3.75/3.74) — Commentary · twitter.com

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