Short Rates Desk
Mon, Aug 03, 2026

Notes for Mon, Aug 03, 2026

Morning brief

· generated 07:07 ET

Post-FOMC duration move; we keep the term-premium steepener

Long end sold to 5.21% while the 2y held 4.23%; we read it as term premium and stay in the steepener.

FOMC and the curve

Our September-hike break test held. The 2y sits at 4.23%[1], back below the 4.37% it printed July 23[2] that we put on record as the trigger. The July 29 hold left the target range at 3.50-3.75%[3], and the hold leaves no case for the front end to price a September move toward certain. The long bond pushed to 5.21%[4] and 2s10s steepened to 47bp[5], from 35bp the session before the meeting[6]. Front end anchored, long end cheapening: we keep the 2s30s steepener.

Iran and the long end

The long-end selloff runs alongside reports that Trump ordered heavy strikes on Iranian energy infrastructure this weekend[7], with desks pricing a $5-15/bbl oil move if Hormuz transit is impaired. We call the move term premium, not a hawkish policy repricing. The front end hasn't moved with the back: EFFR fixed 3.63%[8] and SOFR 3.65%, both unchanged[9] through the escalation headlines, and a durable hawkish shock needs the front to move with the long end. The NY Fed's 10y term-premium estimate stood at 84bp on July 24[10], consistent with the long-end move being a premium story. The military picture is still conflicting, with a quiet window into Friday and no verified sustained energy damage. We're wrong on the read if a verified Hormuz energy hit lands and drags the 2y up with the 30y. The Jones Act waiver, now 135 days in, caps the near-term stagflation tail[11] by keeping regional fuel supplied, which argues against pre-pricing a higher terminal rate off headlines.

Funding

Treasury rebuilt its cash pile. The TGA closed at $970,442M on July 29[12], a $135,025M w/w build that drained reserves[13]. Bank reserves fell to $2,984,570M[14], down $77,579M on the week[15] and back below $3T. The RRP is no longer a buffer here: take-up sat at $2.15B on July 31[16], effectively empty, so further TGA builds pass straight to reserves. SOFR fixed 3.65% July 30[17], right at IORB[18], so funding is firm but not dislocated. Collateral demand stays contained: the richest SOMA lending special, the 11/12/26 bill, drew a 7.5bp fee versus the 5bp floor[19]. We watch SOFR grinding above IORB as the scarcity signal, and it hasn't yet.

Positioning

We keep the 2s30s steepener. The decisive support is the front end holding the break test into and out of the July 29 decision: the 2y at 4.23%[20] is 14bp below the 4.37% trigger[21], and nothing in the hold pushes a September move toward certain. The trade is off if a September hike prices toward certain and the 2y breaks and holds back above 4.37%, which flips us to a bear-flattener. We re-baseline the term-premium leg if a verified US energy strike on Iran drags the front end up with the long end. The read assumes Treasury holds its bill-heavy issuance mix; a coupon upsize at the next refunding adds long-end supply and, if anything, extends the steepener. ISM manufacturing prints today; we treat it as a tie-breaker at most.

Sources read

8 sources read

  • Commentary items: 8

Sources read

8 sources read

  • Commentary items: 8

Citations

  1. [1]2y sits at 4.23% (4.23) — FRED DGS2 · Jul 30, 2026
  2. [2]the 4.37% it printed July 23 (4.37) — FRED DGS2 · Jul 23, 2026
  3. [3]the target range at 3.50-3.75% (3.50-3.75%) — FRED DFEDTARU · Aug 2, 2026
  4. [4]The long bond pushed to 5.21% (5.21) — FRED DGS30 · Jul 30, 2026
  5. [5]2s10s steepened to 47bp (0.47) — FRED T10Y2Y · Jul 31, 2026
  6. [6]from 35bp the session before the meeting (0.35) — FRED T10Y2Y · Jul 28, 2026
  7. [7]heavy strikes on Iranian energy infrastructure this weekend (major US strikes on Iranian energy infrastructure reported imminent, markets pricing Hormuz transit risk and ~$5-15/bbl oil spike if conflict widens) — Commentary · zerohedge.com
  8. [8]EFFR fixed 3.63% (3.63) — NY Fed EFFR · Jul 30, 2026
  9. [9]SOFR 3.65%, both unchanged (3.65) — NY Fed SOFR · Jul 30, 2026
  10. [10]10y term-premium estimate stood at 84bp on July 24 (0.83760) — FRED THREEFYTP10 · Jul 24, 2026
  11. [11]The Jones Act waiver, now 135 days in, caps the near-term stagflation tail (Jones Act waiver (135 days in, likely extended) has moved ~50M barrels and kept regional fuel prices anchored) — Commentary · zerohedge.com
  12. [12]The TGA closed at $970,442M on July 29 (970,442M) — Treasury General Account · Jul 29, 2026
  13. [13]a $135,025M w/w build that drained reserves (+135,025M w/w) — Treasury General Account · Jul 29, 2026
  14. [14]Bank reserves fell to $2,984,570M (2,984,570M) — FRED WRESBAL · Jul 29, 2026
  15. [15]down $77,579M on the week (-77,579M w/w) — FRED WRESBAL · Jul 29, 2026
  16. [16]take-up sat at $2.15B on July 31 (2.151) — FRED RRPONTSYD · Jul 31, 2026
  17. [17]SOFR fixed 3.65% July 30 (3.65) — NY Fed SOFR · Jul 30, 2026
  18. [18]right at IORB (3.65) — FRED IORB · Aug 3, 2026
  19. [19]drew a 7.5bp fee versus the 5bp floor (7.5 bp fee) — Observation · observation:seclend_observations:912797UY1:2026-07-31
  20. [20]the 2y at 4.23% (4.23) — FRED DGS2 · Jul 30, 2026
  21. [21]14bp below the 4.37% trigger (4.37) — FRED DGS2 · Jul 23, 2026

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

Close brief

· generated 16:18 ET

ISM's 55.6 beat firmed the front end while oil unwound the long-end bid; we hold the term-premium steepener

A hot ISM kept terminal pricing intact and the Iran de-escalation pulled war premium out of the long end. Steepener stays on.

Rates

The session split. ISM manufacturing printed 55.6 against a 53.9 consensus, a 170bp beat, with the employment index at 52.8, its first reading above 50 since September 2023, and prices paid at 71.1[1]. That is front-end support and keeps terminal-rate pricing intact; year-end hike pricing still sits near 37bp, down from 44bp a week earlier[2]. Our September-hike break test held: the 2y closed the FOMC week at 4.29%[3], well below the 4.37% trigger we put on record, so the hold stays a hold and we keep the term-premium steepener.

The long-end move

Treasuries richened 4 to 6bp across the curve as Brent fell about 5% after President Trump called off the Iran strike and pointed to talks[4]; 10y yields fell 6bp to 4.68%[5]. We read that as geopolitical premium leaving the long end rather than a policy repricing, because 2s10s tightened only marginally and the curve held its steep shape[6]. The 30y sits at 5.20%, a 19-year high hit after the FOMC[7]. The competing read is that a hot ISM plus a fading war premium kicks off a front-led bear-flattening; we reject it because the front end didn't move with the back on the session, and futures took hike pricing lower on the day. The trade is off if the 2y breaks and holds above 4.37% with September pricing toward certain, which flips us to that bear-flattener.

Funding

The Treasury General Account is the funding item into refunding. The TGA balance rose $135B in the week to July 29[8], and a build that size drains reserves as Treasury pulls cash out of the banking system, tightening funding at the margin. Collateral shows no stress from it: the richest name in SOMA securities lending, the November 12 bill, carried an 8.0bp fee against the 5bp program minimum[9], and the rest of the specials list sits just above the floor, which reads as issue-specific bill demand, not broad scarcity. Our steepener assumes Treasury holds its bill-heavy issuance mix; a coupon upsize at this week's refunding adds long-end supply and, if anything, extends the trade.

Foreign bid and the long end

Foreign supply is the live threat to the back end. The US and Japan ran coordinated yen intervention over the past week, and Treasury leaned on the FIMA repo facility to keep Japanese holders from dumping USTs to fund it[10]. If the MOF has to sell coupons to defend the yen, the largest foreign holder becomes a forced seller of duration[11] and reprices the long end through flows. That hits the back of the curve and works the steepener, so we keep the trade on and watch the JGB/UST basis for confirmation. We'd size lighter if a credible US-Iran deal lands and the oil-premium unwind extends, since a durable move lower in the long end compresses the term premium we're paid on.

Sources read

8 sources read

  • Commentary items: 8

Citations

  1. [1]ISM manufacturing printed 55.6 against a 53.9 consensus, a 170bp beat, with the employment index at 52.8, its first reading above 50 since September 2023, and prices paid at 71.1 (ISM manufacturing beats 53.9 est. by 170bp to 55.6... employment finally breaks above 50 for first time since Sept 2023... Prices Paid 71.1) — Commentary · peterboockvar.substack.com
  2. [2]year-end hike pricing still sits near 37bp, down from 44bp a week earlier (fed funds futures dialed back pricing of rate hikes by year-end to 37bps (from 44bps the week before)) — Commentary · zerohedge.com
  3. [3]the 2y closed the FOMC week at 4.29% (The 2yr Treasury yield fell -4.1bps (+4.5bps Friday) to 4.29%) — Commentary · zerohedge.com
  4. [4]Brent fell about 5% after President Trump called off the Iran strike and pointed to talks (Brent crude futures drop 4.8% to near $84 a barrel after Trump said new talks with Iran would begin on Monday after calling off a planned attack) — Commentary · zerohedge.com
  5. [5]10y yields fell 6bp to 4.68% (US 10-year yields fall 6 bps to 4.68%) — Commentary · zerohedge.com
  6. [6]2s10s tightened only marginally and the curve held its steep shape (curve steepening persists despite relief rally, 2s10s tightened only marginally) — Commentary · zerohedge.com
  7. [7]The 30y sits at 5.20%, a 19-year high hit after the FOMC (Long-end blowout (30Y at 5.20%, 19-yr high post-FOMC)) — Commentary · zerohedge.com
  8. [8]The TGA balance rose $135B in the week to July 29 (+135,025M w/w) — Treasury General Account · Jul 29, 2026
  9. [9]the November 12 bill, carried an 8.0bp fee against the 5bp program minimum (912797UY1 (B 11/12/26) at 8.0 bp) — Observation · observation:seclend_observations:912797UY1:2026-08-03
  10. [10]Treasury leaned on the FIMA repo facility to keep Japanese holders from dumping USTs to fund it (US resorting to FIMA repo backstop to prevent yen-driven foreign selling) — Commentary · peterboockvar.substack.com
  11. [11]If the MOF has to sell coupons to defend the yen, the largest foreign holder becomes a forced seller of duration (if MOF must sell USTs to defend the yen, the largest foreign holder becomes a forced seller of duration, repricing the long end) — Commentary · zerohedge.com

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