Short Rates Desk
Thu, Aug 06, 2026

Notes for Thu, Aug 06, 2026

Morning brief

· generated 07:07 ET

Stay in the 2s10s steepener; Hormuz-inflation test held, payrolls is Friday's live risk

Curve holds at 45bp with the 2-year at 4.20%, well under our 4.37% line; the Hormuz deal is still unverified and payrolls prints Friday.

Rates

We read the past week's curve as a duration move and keep the 2s10s steepener on. The spread held at 45bp Wednesday[1], up from 35bp on July 28[2], and it has stayed in that steeper range since. What decides the read is where the move sits: the 10-year term premium estimate sat at 0.87 on July 31[3], while the 2-year rallied to 4.20% Tuesday[4] from its 4.37% July 23 peak[5]. Heavy long end, anchored front end. That is a steepener, not a front-end payer.

Neither leg of the Hormuz-inflation break test tripped. The 2-year is 17bp below the 4.37% line. Brent fell to $79[6] on renewed reports of an Iran-Oman route, but per Rabobank it is the same deal torpedoed before, still stuck on transit fees, Iran at 7% versus the US at 5%[7]. Until a reopening is verified and holds, we read the 10-year's rally to 4.63%[8] from 4.75% on July 31[9] as term premium unwinding, and it has not pulled the 10-year through the 2-year. We're wrong if a verified reopening rallies the 10-year through the 2-year, or if the 2-year breaks 4.37% on an inflation repricing.

Payrolls

Friday's payrolls is the near test we put on record, and it resolves tomorrow. We re-baseline the steepener if NFP lands firm with hot wages and the 2-year sells off toward the 4.37% line; today's claims print is a minor input by comparison. The inflation channel that would drive that is live: the New York Fed's latest survey work finds nearly half of tariff-paying firms still plan further price increases[10], some six months or more out, and refining margins at record highs[11] with distillate stocks at 30-year seasonal lows[12] keep energy and goods pass-through in play. That is the risk to the front leg; our base case stays the steepener.

Funding

The Treasury General Account rebuilt to $970B on July 29[13], a $135B jump on the week[14], and that is a reserve drain: bank reserves fell $78B[15] to $2.985T[16] over the same span. With RRP essentially empty at $1.65B[17], further Treasury cash builds now hit reserves directly instead of pulling from the facility. SOFR fixed 3.66% Tuesday[18], a basis point above IORB at 3.65%[19], the early mark of that drain, though funding is orderly. On collateral, the November 5 bill (912797UM7) went special at a 56.7bp SOMA lending fee versus the 5bp minimum on August 5[20], up from 15.4bp a day earlier[21], which reads as issue-specific demand for that bill; GC funding shows nothing comparable. Keep that collateral point separate from the duration trade.

Sources read

8 sources read

  • Commentary items: 8

Citations

  1. [1]held at 45bp Wednesday (0.45) — FRED T10Y2Y · Aug 5, 2026
  2. [2]up from 35bp on July 28 (0.35) — FRED T10Y2Y · Jul 28, 2026
  3. [3]the 10-year term premium estimate sat at 0.87 on July 31 (0.86810) — FRED THREEFYTP10 · Jul 31, 2026
  4. [4]the 2-year rallied to 4.20% Tuesday (4.20%) — FRED DGS2 · Aug 4, 2026
  5. [5]from its 4.37% July 23 peak (4.37%) — FRED DGS2 · Jul 23, 2026
  6. [6]Brent fell to $79 (Brent futures dropped to $79/barrel) — Commentary · zerohedge.com
  7. [7]the same deal torpedoed before, still stuck on transit fees, Iran at 7% versus the US at 5% (Iran demands a 7% fee, with exemptions for Chinese and Russian ships, whereas the US proposed 5%.) — Commentary · zerohedge.com
  8. [8]the 10-year's rally to 4.63% (4.63%) — FRED DGS10 · Aug 4, 2026
  9. [9]from 4.75% on July 31 (4.75%) — FRED DGS10 · Jul 31, 2026
  10. [10]nearly half of tariff-paying firms still plan further price increases (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
  11. [11]refining margins at record highs (refining margins for gasoline and diesel jumped to new record highs) — Commentary · zerohedge.com
  12. [12]distillate stocks at 30-year seasonal lows (Distillate stocks saw a sizable draw and are seasonally at lowest level since 1996) — Commentary · zerohedge.com
  13. [13]rebuilt to $970B on July 29 (970,442M closing) — Treasury General Account · Jul 29, 2026
  14. [14]a $135B jump on the week (+135,025M w/w) — Treasury General Account · Jul 29, 2026
  15. [15]bank reserves fell $78B (-77,579M w/w) — FRED WRESBAL · Jul 29, 2026
  16. [16]to $2.985T (2,984,570M) — FRED WRESBAL · Jul 29, 2026
  17. [17]essentially empty at $1.65B (1.65) — FRED RRPONTSYD · Aug 5, 2026
  18. [18]SOFR fixed 3.66% Tuesday (3.66%) — NY Fed SOFR · Aug 4, 2026
  19. [19]IORB at 3.65% (3.65%) — FRED IORB · Aug 6, 2026
  20. [20]a 56.7bp SOMA lending fee versus the 5bp minimum on August 5 (56.7 bp) — Observation · observation:seclend_observations:912797UM7:2026-08-05
  21. [21]up from 15.4bp a day earlier (15.4 bp) — Observation · observation:seclend_observations:912797UM7:2026-08-04

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

Close brief

· generated 16:20 ET

Steepener stays into payrolls; both break tests held and the funding tightening carried no stress

We keep the 2s10s steepener. The TGA rebuild drained reserves $77.6bn without funding stress, and NFP tomorrow is the only live catalyst.

The call

We stay in the 2s10s steepener into Friday's payrolls. Both break tests on record held. The 2-year sits at 4.20%[1], seventeen basis points below the 4.37% inflation-repricing trigger[2] and showing no move toward breaking it higher. No verified Hormuz reopening landed: Iran's parliament is still reviewing a draft that would restrict transit[3], so the leg that needed a confirmed reopening to rally the 10-year through the 2-year never fired. 2s10s closed the prior session at +45bp[4], up from +31bp in late June[5], and today gave us nothing to fade.

Funding

The Treasury General Account rebuild is the funding story into payrolls. The TGA closed the week to July 29 at $970.4bn[6], a $135.0bn weekly build[7], and that drain pulled reserve balances down $77.6bn[8] to $2.98 trillion[9] over the same week. With the RRP already floored at $1.65bn on August 5[10], the build came straight out of reserves rather than the facility. None of it read as stress: SOFR printed 3.64%[11] against IORB at 3.65%[12], a one-basis-point SOFR-IORB gap that says banks are still lending, GCF Treasury repo cleared 3.657%[13], and EFFR held 3.63%[14]. SOMA lending fees show only mild issue-specific demand, the richest special at a 9.3bp fee versus the 5bp minimum[15]. We read funding as calendar tightening with levels orderly.

Front end into NFP

Payrolls tomorrow is the only live catalyst, and it is binary for the front end. Initial claims held below 200k this week, near the lowest since 1969[16], with continuing claims just above 1.8 million[17]: a low-hire, no-fire labor market. Two-sided risk into the print. A sub-150k payrolls number would pull the 2y-5y lower on September repricing[18], while the claims floor argues the Committee stays higher-for-longer on tight underlying conditions. We lean the front end lower but would not add outright payers or receivers on claims alone; the 2-year already rallied 17bp off its July 23 high, so much of the dovish lean is priced. We re-baseline the steepener if payrolls beat hard and the 2-year retakes 4.37% on an inflation read.

Long end and Hormuz

The 30-year selloff is term premium, not a hawkish policy repricing. The long bond sits at 5.18%[19], up from 4.86% in late June[20], while EFFR and SOFR held their 3.63-3.65% band. Pinned front-end money rates against a 32bp back-up in the 30-year point at duration risk premium: BoJ carry unwind and rising JGB yields dragging US long rates higher[21], fiscal supply, and Warsh's choice to drop forward guidance leaving the curve to reprice on data rather than Fed signals[22]. Oil is bid on the Hormuz draft[23], an inflation and term-premium vector that leaves front-end pricing alone. We are wrong on the term-premium read if a verified reopening or a clean payrolls miss drags the whole curve lower together, which would make it a growth story. This assumes Treasury holds its bill-issuance pace; the roughly $210bn of bills auctioned Thursday and Friday[24] settle straight into the reserve drain we flagged.

Sources read

8 sources read

  • Commentary items: 8

Citations

  1. [1]The 2-year sits at 4.20% (4.20000000) — FRED DGS2 · Aug 4, 2026
  2. [2]the 4.37% inflation-repricing trigger (4.37000000) — FRED DGS2 · Jul 23, 2026
  3. [3]Iran's parliament is still reviewing a draft that would restrict transit (Iran parliament reviews draft Hormuz plan banning US- and Israel-linked vessels.) — Commentary · zerohedge.com
  4. [4]2s10s closed the prior session at +45bp (0.45000000) — FRED T10Y2Y · Aug 5, 2026
  5. [5]up from +31bp in late June (0.31000000) — FRED T10Y2Y · Jun 25, 2026
  6. [6]closed the week to July 29 at $970.4bn (970,442M) — Treasury General Account · Jul 29, 2026
  7. [7]a $135.0bn weekly build (+135,025M w/w) — Treasury General Account · Jul 29, 2026
  8. [8]reserve balances down $77.6bn (-77,579M w/w) — FRED WRESBAL · Jul 29, 2026
  9. [9]to $2.98 trillion (2,984,570M) — FRED WRESBAL · Jul 29, 2026
  10. [10]the RRP already floored at $1.65bn on August 5 (1.65) — FRED RRPONTSYD · Aug 5, 2026
  11. [11]SOFR printed 3.64% (3.64000%) — NY Fed SOFR · Aug 5, 2026
  12. [12]IORB at 3.65% (3.65000000) — FRED IORB · Aug 6, 2026
  13. [13]GCF Treasury repo cleared 3.657% (UST 3.65700) — DTCC GCF repo · Aug 5, 2026
  14. [14]EFFR held 3.63% (3.63000%) — NY Fed EFFR · Aug 5, 2026
  15. [15]the richest special at a 9.3bp fee versus the 5bp minimum (9.3 bp) — Observation · observation:seclend_observations:912797TV9:2026-08-06
  16. [16]Initial claims held below 200k this week, near the lowest since 1969 (Initial jobless claims remained below 200k, hovering near their lowest level since 1969.) — Commentary · zerohedge.com
  17. [17]continuing claims just above 1.8 million (Continuing jobless claims ticked up just above 1.8 million Americans.) — Commentary · zerohedge.com
  18. [18]pull the 2y-5y lower on September repricing (a sub-150k print would likely trigger 25bp repricing lower across 2y-5y) — Commentary · zerohedge.com
  19. [19]The long bond sits at 5.18% (5.18000000) — FRED DGS30 · Aug 4, 2026
  20. [20]up from 4.86% in late June (4.86000000) — FRED DGS30 · Jun 24, 2026
  21. [21]BoJ carry unwind and rising JGB yields dragging US long rates higher (This is helping to drag the US 10 yr yield back to 4.70%) — Commentary · peterboockvar.substack.com
  22. [22]Warsh's choice to drop forward guidance leaving the curve to reprice on data rather than Fed signals (markets are pricing policy via long-end moves and dollar weakness, not Fed signals) — Commentary · employamerica.org
  23. [23]Oil is bid on the Hormuz draft (Oil rises as proposed Strait restrictions raise supply concerns.) — Commentary · zerohedge.com
  24. [24]the roughly $210bn of bills auctioned Thursday and Friday (Treasury auctioning $210bln bills Thu-Fri) — Commentary · conks.plumbing

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