Short Rates Desk
Tue, Aug 04, 2026

Notes for Tue, Aug 04, 2026

Morning brief

· generated 07:04 ET

Treasury's account rebuild drains reserves and keeps the front end bid

The $135B TGA build pulled reserves lower and lifted SOFR above IORB; the long-end selloff is still term premium, so we hold the 2s30s steepener.

Funding

Treasury rebuilt its account to $970,442M by July 29[1], a $135,025M build on the week[2] that pulled cash straight out of the banking system. Bank reserves fell $77,579M[3] over the same week, to $2,984,570M[4]. SOFR fixed 3.66% Friday[5], a basis point above IORB at 3.65%[6], and GCF Treasury repo printed 3.68% Monday[7]. The RRP is effectively empty at $2.1B[8], so the cash the account build absorbed is not coming back from the facility; it is coming out of reserves. Funding is firm rather than stressed, but the direction of travel keeps the front end bid into a lighter reserve base.

Positioning

Our September-hike break test held. The 2y fixed 4.28% Friday[9], below the 4.37% trigger we put on record, and nothing in the front end forces a re-baseline. The long-end selloff ran further, with the 30y at 5.27%[10] and the 10y at 4.75% Friday[11]; 2s10s sat at 0.45% Monday[12], up from 0.34% a week earlier[13]. With the target range pinned at 3.50-3.75%[14] and EFFR steady at 3.63%[15], the back-end move is term premium, not a repricing of the path. We keep the 2s30s steepener, receiving the front and paying the long end into refunding.

Risks

The risk to the long end is oil. Rabobank's Picton flags the now-familiar pattern: the President paused strikes on Iran again over the weekend[16], and Brent fell in early trade. A durable de-escalation pulls the inflation bid out of the back end and cuts against the steepener. We lean against it. Goldman's Dart flags a diesel squeeze building into winter, with the European gasoil crack above $70[17], which keeps a structural bid under crude even as the headline calms. The trade is off if the 2y breaks and holds above 4.37% with the front end selling off alongside the back, which flips us to a bear-flattener. The 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.

Sources read

8 sources read

  • Commentary items: 8

Citations

  1. [1]$970,442M by July 29 (970,442M) — Treasury General Account · Jul 29, 2026
  2. [2]$135,025M build on the week (+135,025M w/w) — Treasury General Account · Jul 29, 2026
  3. [3]Bank reserves fell $77,579M (-77,579M w/w) — FRED WRESBAL · Jul 29, 2026
  4. [4]to $2,984,570M (2,984,570M) — FRED WRESBAL · Jul 29, 2026
  5. [5]SOFR fixed 3.66% Friday (3.66%) — NY Fed SOFR · Jul 31, 2026
  6. [6]IORB at 3.65% (3.65) — FRED IORB · Aug 4, 2026
  7. [7]GCF Treasury repo printed 3.68% Monday (UST 3.68300) — DTCC GCF repo · Aug 3, 2026
  8. [8]effectively empty at $2.1B (2.127) — FRED RRPONTSYD · Aug 3, 2026
  9. [9]The 2y fixed 4.28% Friday (4.28) — FRED DGS2 · Jul 31, 2026
  10. [10]the 30y at 5.27% (5.27) — FRED DGS30 · Jul 31, 2026
  11. [11]the 10y at 4.75% Friday (4.75) — FRED DGS10 · Jul 31, 2026
  12. [12]2s10s sat at 0.45% Monday (0.45) — FRED T10Y2Y · Aug 3, 2026
  13. [13]up from 0.34% a week earlier (0.34) — FRED T10Y2Y · Jul 27, 2026
  14. [14]target range pinned at 3.50-3.75% (3.75 upper bound; DFEDTARL 3.50 lower bound) — FRED DFEDTARU · Aug 3, 2026
  15. [15]EFFR steady at 3.63% (3.63%) — NY Fed EFFR · Jul 31, 2026
  16. [16]the President paused strikes on Iran again over the weekend (the US President has (again) halted strikes on Iran and teased that a diplomatic breakthrough is close) — Commentary · zerohedge.com
  17. [17]diesel squeeze building into winter, with the European gasoil crack above $70 (European gasoil crack has surged above $70 per barrel) — Commentary · zerohedge.com

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

Close brief

· generated 16:20 ET

The long-end selloff is term premium, and we keep the steepener.

Japan's weak JGB auction drove duration higher while a JOLTS miss held the front; our 4.37% two-year break test never came close.

Duration

We read today's price action as a duration move and keep the steepener. The 30-year closed the July 31 session at 5.27%, its highest since 2007[1], while front-end reference rates sat still: SOFR fixed at 3.65%[2] and EFFR at 3.63%[3] against a Fed ceiling of 3.75%[4]. A durable hawkish shock needs the front to move with the back, and the front did not confirm, so we attribute the long-end selloff to term premium.

The driver is Japan. The 10-year JGB auction cleared at a 2.56 bid-to-cover, the weakest since May 2025[5], and BoJ September hike odds near 50% pulled the UST 10-year back through 4.70%[6]. The NY Fed's Liberty Street post today puts investors' perceived r-star on a slow, stable path with wide uncertainty bands[7], which fits a term-premium read, not a neutral-rate regime shift.

Front end

JOLTS printed 7.359M against a 7.454M median, the first miss after five straight beats[8], and that keeps the front bid into Friday's payrolls. The 2-year closed July 31 at 4.28%[9], well below our 4.37% desk threshold, so the September-hike break test on record held and the steepener stays on. Core factory orders falling 0.4% month over month[10] reinforce the soft-demand read.

We're wrong if the 2-year breaks and holds above 4.37% with the front selling off alongside the back, which flips us to a bear-flattener. ISM services tomorrow is the near-term test: a strong services print lifts the front and pressures the trade.

Funding

The Treasury General Account rebuilt by $135.0B in the week to July 29[11], to $970.4B[12], and that drain pulled reserve balances down $77.6B[13] to $2.98T[14]. Funding absorbed it cleanly: SOFR pinned to IORB at 3.65%[15], EFFR two basis points below at 3.63%[16], and overnight RRP take-up sat near the floor at $2.1B[17]. With the RRP cushion already gone, further account rebuild lands directly on reserves, so we watch the next drain closely even though today shows no stress. The top SOMA lending special, the 11/05/26 bill at a 15.4bp fee versus the 5bp minimum[18], reflects issue-specific demand, with no systemic read.

Into tomorrow

Wednesday's refunding is the catalyst. Our steepener assumes Treasury holds its bill-heavy issuance mix; a coupon upsize adds long-end supply and, on our read, extends the trade rather than breaking it. ISM services lands at 14:00 UTC.

On oil, Bessent's claim of a Hormuz deal today or tomorrow pushed Brent below $80[19], but Iran denies formal talks and a vessel was struck in the strait, so we treat it as a one-day oil-volatility move with no rates repricing behind it. The energy inflation vector stays live into H2, and it argues against chasing any front-end rally led by energy disinflation.

Sources read

8 sources read

  • Commentary items: 8

Citations

  1. [1]The 30-year closed the July 31 session at 5.27%, its highest since 2007 (5.27) — FRED DGS30 · Jul 31, 2026
  2. [2]SOFR fixed at 3.65% (3.65000%) — NY Fed SOFR · Aug 3, 2026
  3. [3]EFFR at 3.63% (3.63000%) — NY Fed EFFR · Aug 3, 2026
  4. [4]a Fed ceiling of 3.75% (3.75000000) — FRED DFEDTARU · Aug 4, 2026
  5. [5]The 10-year JGB auction cleared at a 2.56 bid-to-cover, the weakest since May 2025 (10Y JGB auction had a 2.56 bid-to-cover ratio, far below the 3.3 average and the lowest since May 2025) — Commentary · zerohedge.com
  6. [6]BoJ September hike odds near 50% pulled the UST 10-year back through 4.70% (BoJ September hike odds doubled to ~50%; JGB 2yr at 31yr high is now pulling UST 10yr back through 4.70%) — Commentary · peterboockvar.substack.com
  7. [7]The NY Fed's Liberty Street post today puts investors' perceived r-star on a slow, stable path with wide uncertainty bands (investors' 95 percent confidence bands of r-star at ±170 basis points ... a remarkably stable path from the 1960s to 2022 between 0 percent and 2.5 percent) — Commentary · libertystreeteconomics.newyorkfed.org
  8. [8]JOLTS printed 7.359M against a 7.454M median, the first miss after five straight beats (June job openings at 7.359M ... below the median estimate of 7.454M, breaking a five-month streak of JOLTS beats) — Commentary · zerohedge.com
  9. [9]The 2-year closed July 31 at 4.28% (4.28) — FRED DGS2 · Jul 31, 2026
  10. [10]Core factory orders falling 0.4% month over month (Core factory orders down 0.4% MoM (biggest drop since Apr 2025)) — Commentary · zerohedge.com
  11. [11]rebuilt by $135.0B in the week to July 29 (+135,025M w/w) — Treasury General Account · Jul 29, 2026
  12. [12]to $970.4B (970,442M) — Treasury General Account · Jul 29, 2026
  13. [13]reserve balances down $77.6B (-77,579M w/w) — FRED WRESBAL · Jul 29, 2026
  14. [14]to $2.98T (2,984,570M) — FRED WRESBAL · Jul 29, 2026
  15. [15]SOFR pinned to IORB at 3.65% (3.65000000) — FRED IORB · Aug 4, 2026
  16. [16]EFFR two basis points below at 3.63% (3.63000%) — NY Fed EFFR · Aug 3, 2026
  17. [17]overnight RRP take-up sat near the floor at $2.1B (2.127) — FRED RRPONTSYD · Aug 3, 2026
  18. [18]the 11/05/26 bill at a 15.4bp fee versus the 5bp minimum (912797UM7 (B 11/05/26) at 15.4 bp, $3.24B accepted) — Observation · observation:seclend_observations:912797UM7:2026-08-04
  19. [19]Bessent's claim of a Hormuz deal today or tomorrow pushed Brent below $80 (Bessent claims a Hormuz agreement could come 'today or tomorrow'. Brent fell below $80 on reports of progress in Oman-mediated Hormuz talks.) — Commentary · zerohedge.com

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