Short Rates Desk
Wed, Aug 05, 2026

Notes for Wed, Aug 05, 2026

Morning brief

· generated 07:06 ET

Overnight duration rally is an oil-and-Japan term-premium unwind; we hold the 2s10s steepener

Brent's slide and Japan's FIMA pivot pulled duration richer, but the move isn't confirmed; the front stays anchored and our steepener holds.

Duration

We keep the 2s10s steepener. Two overnight developments pulled duration richer, and the decisive point is that neither is confirmed. Brent's front future fell more than 7% on Hormuz deal-talk[1], and Japan signaled it would tap the Fed's FIMA facility to defend the yen rather than sell Treasuries, per Picton[2]. The 10-year fell to 4.70% on August 3[3] from 4.75% July 31[4], the 30-year to 5.23%[5], and the 2-year to 4.25%[6].

The late-July back-up was a term-premium move: the New York Fed 10-year term premium estimate reached 0.87% on July 31[7], up from 0.82% on July 27[8]. The overnight richening unwinds part of that, and we read it as reversible, because the Hormuz ground is still contested, with Iran denying formal talks and a vessel struck in the strait[9]. June JOLTS at 7.359M missed and held the front Tuesday[10].

Our 4.37% two-year break test held: the 2-year holds well below the threshold, rallying with the back rather than against it, so the standing bear-flattener trip stays untouched and the steepener stays on. The live risk now is a bull-flattener, where a verified Hormuz deal compresses term premium while the front stays pinned. We're wrong if the 10-year outruns the 2-year to the downside on a confirmed deal; 2s10s at 0.43%[11] versus 0.47% July 31[12] is a modest give-back that falls well short of that turn.

Funding

The Treasury General Account built 135.0B in the week to July 29[13], to 970.4B[14] from 835.4B[15], and that drain hit reserves, since the RRP is already spent. Reserve balances fell 77.6B[16] to 2.98T[17] over the same week. RRP take-up sits at just 2.3B on August 4[18], so the next TGA rebuild comes straight out of reserves.

SOFR fixed 3.65% Friday[19], pinned to IORB at 3.65%[20], with EFFR at 3.63%[21]: firm funding with no scarcity signal. The cash cushion that used to absorb Treasury's account swings is gone, so front-end funding is now geared directly to the TGA path, and today's refunding sets that path.

Refunding and inflation

Treasury's August refunding lands at 12:30 UTC and it is the day's catalyst. Our steepener assumes a bill-heavy issuance mix; a coupon upsize adds long-end supply and, on our read, extends the trade rather than ends it, so a heavier coupon calendar is not a reason to cut the position.

The term-premium bid also has a fundamental leg beyond oil. New York Fed regional surveys show nearly half of tariff-paying firms still plan more price increases, 47% of service firms and 44% of manufacturers[22], which keeps the inflation pipeline live into the back end. ISM services prints at 14:00 UTC.

Sources read

8 sources read

  • Commentary items: 8

Sources read

8 sources read

  • Commentary items: 8

Citations

  1. [1]Brent's front future fell more than 7% on Hormuz deal-talk (The front Brent crude future fell by more than 7%) — Commentary · zerohedge.com
  2. [2]Japan signaled it would tap the Fed's FIMA facility to defend the yen rather than sell Treasuries, per Picton (Japan intended to tap the Fed's FIMA facility to defend the Yen in the future, thereby avoiding the necessity to sell Treasuries) — Commentary · zerohedge.com
  3. [3]4.70% on August 3 (4.70) — FRED DGS10 · Aug 3, 2026
  4. [4]4.75% July 31 (4.75) — FRED DGS10 · Jul 31, 2026
  5. [5]the 30-year to 5.23% (5.23) — FRED DGS30 · Aug 3, 2026
  6. [6]the 2-year to 4.25% (4.25) — FRED DGS2 · Aug 3, 2026
  7. [7]reached 0.87% on July 31 (0.86810) — FRED THREEFYTP10 · Jul 31, 2026
  8. [8]0.82% on July 27 (0.82080) — FRED THREEFYTP10 · Jul 27, 2026
  9. [9]Iran denying formal talks and a vessel struck in the strait (Iran denies formal talks, a vessel was just struck in the strait) — Commentary · zerohedge.com
  10. [10]June JOLTS at 7.359M missed and held the front Tuesday (June job openings at 7.359M...below the median estimate of 7.454M, breaking a five-month streak of JOLTS beats) — Commentary · zerohedge.com
  11. [11]2s10s at 0.43% (0.43) — FRED T10Y2Y · Aug 4, 2026
  12. [12]0.47% July 31 (0.47) — FRED T10Y2Y · Jul 31, 2026
  13. [13]The Treasury General Account built 135.0B in the week to July 29 (+135,025M w/w) — Treasury General Account · Jul 29, 2026
  14. [14]970.4B (970,442M) — Treasury General Account · Jul 29, 2026
  15. [15]835.4B (835,417M) — Treasury General Account · Jul 22, 2026
  16. [16]Reserve balances fell 77.6B (-77,579M w/w) — FRED WRESBAL · Jul 29, 2026
  17. [17]2.98T (2,984,570M) — FRED WRESBAL · Jul 29, 2026
  18. [18]2.3B on August 4 (2.251) — FRED RRPONTSYD · Aug 4, 2026
  19. [19]SOFR fixed 3.65% Friday (3.65) — NY Fed SOFR · Aug 3, 2026
  20. [20]IORB at 3.65% (3.65) — FRED IORB · Aug 5, 2026
  21. [21]EFFR at 3.63% (3.63) — NY Fed EFFR · Aug 3, 2026
  22. [22]47% of service firms and 44% of manufacturers (47 percent of service firms and 44 percent of manufacturers that paid tariffs directly saying they have more tariff-induced price increases to come) — Commentary · libertystreeteconomics.newyorkfed.org

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

Close brief

· generated 16:22 ET

Flat coupons and cheaper oil keep the 2s10s steepener on

Treasury held coupon sizes flat and leaned harder on bills; soft ADP and collapsing oil back the front-end rally, and we keep the 2s10s steepener.

Refunding

Treasury left nominal coupon and floating-rate note auction sizes unchanged[1], deepening its lean on bills. Next week's refunding totals $125B, split $58B 3-year, $42B 10-year, and $25B 30-year, raising roughly $28.7B in new cash[2]. That confirms the bill-heavy mix our steepener rides on. Our record said a coupon upsize would extend the trade rather than end it; we got no upsize, so the assumption holds outright and the steepener stays. Bessent deferring the coupon-mix decision past the midterms leaves the eventual long-end supply overhang in place, and long-end term premium is already elevated: the 10-year term premium estimate sat at 0.87% on July 31[3], up from 0.68% in late June[4].

Curve and the steepener

Both break tests on record held. Take our 4.37% two-year threshold first: the 2-year sat at 4.25% on August 3[5], well under it, so the standing bear-flattener trip stays untouched. Our second test, the 10-year outrunning the 2-year lower on a confirmed deal, needs a confirmed deal, and we don't have one. Iran says the Hormuz route is agreed with Oman alone[6], Trump keeps the timeline vague, and the messaging runs two-sided, so the bull-flattening trigger hasn't landed. 2s10s at 0.43% on August 4[7] is a 4bp give-back from 0.47% on July 31[8], modest and still wide by the summer's range.

Today pushed the front end our way. ADP printed 44k in July against roughly 65k consensus[9], the softest since January, and oil sliding toward $75 dragged the 1-year breakeven to 1.80%, the lowest since 2024[10]. Both pull the 2-year down and steepen the curve.

The read we weighed and rejected: today's ISM services print, with Prices Paid 70.3 against 65.0 expected and employment down to 47.4 from 51.2[11], reads stagflationary and could bear-flatten through a hawkish front-end repricing. We reject it for now because the front end hasn't moved. EFFR is pinned at 3.63%[12], funding is fixing flat to IORB[13], and the 2-year is nowhere near our 4.37% line, so the sticky-inflation impulse isn't in the front end yet. We're wrong if a verified Hormuz deal rallies the 10-year through the 2-year, or if the 2-year breaks 4.37% on an inflation repricing. Friday's payrolls is the near test: we re-baseline if NFP lands firm with hot wages and the 2-year sells off.

Funding

The TGA rebuild drained reserves without straining them. The Treasury General Account closed at $970B on July 29[14], up $135B on the week[15], and reserve balances fell $77.6B[16] to $2.98T over the same span[17]. The account has since drawn down to about $870B, roughly $80B under target[18], so the rebuild runs into this week's refunding. No scarcity showed up: SOFR fixed at 3.66%[19] against IORB at 3.65%[20], the RRP sat near-empty at $2.3B[21], and banks parked rather than scrambled for cash[22]. Into further bill supply and more cash-building, funding holds calm and the reserve path is what we watch. One issue-specific note: the November 5 bill (912797UM7) drew a 56.7bp SOMA lending fee on August 5 versus the 5bp minimum[23], up from 15.4bp a day earlier[24], collateral demand in that CUSIP rather than a systemic signal.

Sources read

8 sources read

  • Commentary items: 8

Sources read

8 sources read

  • Commentary items: 8

Citations

  1. [1]Treasury left nominal coupon and floating-rate note auction sizes unchanged (Treasury announced no change to note and bond auction sizes in quarterly refunding) — Commentary · zerohedge.com
  2. [2]totals $125B, split $58B 3-year, $42B 10-year, and $25B 30-year, raising roughly $28.7B in new cash (Next week's refunding auctions total $125 billion: $58B 3-year, $42B 10-year, $25B 30-year, raising approximately $28.7B in new cash) — Commentary · zerohedge.com
  3. [3]the 10-year term premium estimate sat at 0.87% on July 31 (0.86810) — FRED THREEFYTP10 · Jul 31, 2026
  4. [4]up from 0.68% in late June (0.67820) — FRED THREEFYTP10 · Jun 29, 2026
  5. [5]the 2-year sat at 4.25% on August 3 (4.25) — FRED DGS2 · Aug 3, 2026
  6. [6]Iran says the Hormuz route is agreed with Oman alone (Iran insists the talks are only with Oman; Iran state broadcaster says talks 'have nothing to do with the United States') — Commentary · zerohedge.com
  7. [7]2s10s at 0.43% on August 4 (0.43) — FRED T10Y2Y · Aug 4, 2026
  8. [8]0.47% on July 31 (0.47) — FRED T10Y2Y · Jul 31, 2026
  9. [9]ADP printed 44k in July against roughly 65k consensus (ADP said 44k private sector jobs were added in July, 21k below the estimate) — Commentary · peterboockvar.substack.com
  10. [10]oil sliding toward $75 dragged the 1-year breakeven to 1.80%, the lowest since 2024 (Oil collapsing toward $75 (Brent -10% since Friday)... 1yr UST breakeven now 1.80%, the lowest since 2024) — Commentary · zerohedge.com
  11. [11]Prices Paid 70.3 against 65.0 expected and employment down to 47.4 from 51.2 (ISM Prices Paid significantly exceeded expectations at 70.3 vs 65.0 expected; ISM employment tumbled into contraction (47.4 from 51.2)) — Commentary · zerohedge.com
  12. [12]EFFR is pinned at 3.63% (3.63) — NY Fed EFFR · Aug 4, 2026
  13. [13]funding is fixing flat to IORB (SOFR-IORB spread flat at 0bps signals banks parked, not desperate for funding) — Commentary · conks.plumbing
  14. [14]closed at $970B on July 29 (970,442M) — Treasury General Account · Jul 29, 2026
  15. [15]up $135B on the week (+135,025M w/w) — Treasury General Account · Jul 29, 2026
  16. [16]reserve balances fell $77.6B (-77,579M w/w) — FRED WRESBAL · Jul 29, 2026
  17. [17]$2.98T over the same span (2,984,570M) — FRED WRESBAL · Jul 29, 2026
  18. [18]drawn down to about $870B, roughly $80B under target (TGA down $7bln to $870bln, now $80bln below target) — Commentary · conks.plumbing
  19. [19]SOFR fixed at 3.66% (3.66) — NY Fed SOFR · Aug 4, 2026
  20. [20]IORB at 3.65% (3.65) — FRED IORB · Aug 5, 2026
  21. [21]the RRP sat near-empty at $2.3B (2.251) — FRED RRPONTSYD · Aug 4, 2026
  22. [22]banks parked rather than scrambled for cash (SOFR-IORB spread flat at 0bps signals banks parked, not desperate for funding) — Commentary · conks.plumbing
  23. [23]56.7bp SOMA lending fee on August 5 versus the 5bp minimum (912797UM7 (B 11/05/26) at 56.7 bp fee, $2.97B accepted) — Observation · observation:seclend_observations:912797UM7:2026-08-05
  24. [24]up from 15.4bp a day earlier (912797UM7 (B 11/05/26) at 15.4 bp, $3.24B accepted) — Observation · observation:seclend_observations:912797UM7:2026-08-04

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