Short Rates Desk
Wed, Aug 12, 2026

Notes for Wed, Aug 12, 2026

Morning brief

· generated 07:06 ET

Keep the 2s10s steepener into July CPI; funding calm, the break test fires on the print

The 2s10s spread reached 0.48%, the widest of this leg; we carry the steepener into today's CPI and would add on a hot-print flatten.

Curve

We carry the 2s10s steepener into this morning's July CPI and would add on any hot-print flatten. The 2s10s spread reached 0.48% on Aug 11[1], up from 0.43% a week earlier[2], the widest of this leg. Longer maturities have moved most since early August: thirty-year yields at 5.25%[3] and tens at 4.72% (Aug 10)[4] sit well above the front. We read that as a duration and supply story.

We carry one live break test on record: we're wrong if today's CPI runs hot and lifts 2Y back through 4.19%. Twos last printed 4.25% (Aug 10)[5], above that line, but that print predates yesterday's close, so the test turns on the reaction to the number and we carry in. Whether this is a steepener or a hawkish shock hinges on the front end, and the front end has not moved: EFFR held 3.63% (Aug 10)[6], pinned inside the 3.50-3.75% target[7], which anchors twos. The trade is off if the print drives the front end higher, twos repricing with the short end, and flattens the curve.

Funding

Funding is calm and the cash assumption carries. SOFR held 3.63% (Aug 10)[8], two basis points under IORB at 3.65% (Aug 12)[9]; reserves are ample, not scarce. RRP take-up is minimal at $1.25bn (Aug 11)[10], cash sitting in bills and repo rather than at the Fed. The TGA drew down to $929.3bn (Aug 5)[11] from $970.4bn a week earlier[12], adding reserves at the margin. The steepener still assumes Treasury holds its bill-issuance pace; the refunding is set and the calendar flags no coupon upsize. If that changes we re-baseline.

Positioning

Yesterday's $58bn 3-year note auction drew above-average demand[13] at 4.291%, up from 4.179%[14] at the July sale. Firm sponsorship the day before CPI tells us real money is positioned for a benign number, which cuts both ways: a hot print lands on light hedges and the front-end selloff runs harder. Keep the steepener duration-neutral, long 2Y against short 10Y, through today's print and into the Aug 17 refunding settlement[15], and size for the CPI tail rather than carrying it naked.

Sources read

8 sources read

  • Commentary items: 8

Citations

  1. [1]reached 0.48% on Aug 11 (0.48) — FRED T10Y2Y · Aug 11, 2026
  2. [2]up from 0.43% a week earlier (0.43) — FRED T10Y2Y · Aug 4, 2026
  3. [3]thirty-year yields at 5.25% (5.25) — FRED DGS30 · Aug 10, 2026
  4. [4]tens at 4.72% (Aug 10) (4.72) — FRED DGS10 · Aug 10, 2026
  5. [5]Twos last printed 4.25% (Aug 10) (4.25) — FRED DGS2 · Aug 10, 2026
  6. [6]EFFR held 3.63% (Aug 10) (3.63) — NY Fed EFFR · Aug 10, 2026
  7. [7]pinned inside the 3.50-3.75% target (3.50 lower / 3.75 upper) — FRED DFEDTARU · Aug 11, 2026
  8. [8]SOFR held 3.63% (Aug 10) (3.63) — NY Fed SOFR · Aug 10, 2026
  9. [9]IORB at 3.65% (Aug 12) (3.65) — FRED IORB · Aug 12, 2026
  10. [10]minimal at $1.25bn (Aug 11) (1.25) — FRED RRPONTSYD · Aug 11, 2026
  11. [11]$929.3bn (Aug 5) (929,325M) — Treasury General Account · Aug 5, 2026
  12. [12]from $970.4bn a week earlier (970,442M) — Treasury General Account · Jul 29, 2026
  13. [13]$58bn 3-year note auction drew above-average demand ($58 billion worth of three-year notes on Tuesday, revealing the sale attracted above average demand) — Web · rttnews.com
  14. [14]at 4.291%, up from 4.179% (yield of 4.291%, up from the previous auction's 4.179%) — Web · fx.co
  15. [15]Aug 17 refunding settlement (3-Year NOTE auction Aug 11, settlement Monday, August 17, 2026) — Web · home.treasury.gov

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

Close brief

· generated 16:21 ET

We hold the 2s10s steepener after a soft July CPI; the break test didn't fire

July CPI ran 0.1%/0.2% with core YoY at a five-month low; front end bid, steepener intact, funding calm into PPI.

CPI

July CPI printed in line, headline +0.1% and core +0.2% m/m[1], and the composition ran dovish. Core slowed to 2.48% YoY, a five-month low, and core services ex-shelter fell to 2.78%, the softest since September 2021[2]. Shelter eased to 3.18% YoY from 3.28%[3]. Front end traded bid on the print[4], and September hike odds are tumbling[5].

Our standing note carried one break test: wrong if a hot CPI lifted 2Y back through 4.19%. The print was soft and twos rallied, so it did not fire; 2Y closed 8/10 at 4.25%[8] before today's move lower. The steepener stays on. The hedge here is energy roll-off: energy dragged headline[6] and OER/rent still ran near +0.3% m/m[7]. We weighed that and keep the disinflation read, because the softness sat in core services ex-shelter and core YoY rather than energy alone. We hold size modest into tomorrow's PPI given the August oil rebound.

Positioning

2s10s widened to 0.48% on 8/11[9] from 0.35% on 7/28[10], the steepener working as the front rallied and the long end held cheap. The 10Y term-premium estimate sat at 0.83 on 8/07[11], up from 0.70 at end-June[12], and the long end stays cheap while the oil disruption runs; the EIA now carries the shortfall through end-2027[13].

Today's 10Y auction cleared at 4.683%, the highest auction yield since 2007[14], tailing the when-issued by about a basis point, the first tail since May, on a 2.53 bid-to-cover with 76.7% indirect[15]. Demand held, and we attribute the tail to supply and term premium at these yield levels. It fits the long-end leg: 10Y at 4.72%[16] and 30Y at 5.25% on 8/10[17] keep the back end anchored high.

Funding

Funding is calm and the cash assumption carries. SOFR fixed 3.64% on 8/11[18], a basis point under IORB at 3.65%[19], with EFFR at 3.63%[20] inside the 3.50-3.75% target range[21]. GCF Treasury printed 3.67%[22]. Reserves at $2.99T[23] leave the front end comfortable.

One collateral note: the Feb-18-27 bill (912797TV9) drew the top SOMA lending fee at 85.8bp versus the 5bp minimum[24], down from 153.8bp on 8/11[25]. That is issue-specific demand on one CUSIP, and it eased today.

Into tomorrow

PPI and claims print Thursday. We hold the 2s10s steepener (long the 2Y, short 10Y duration-weighted) into the September meeting. We're wrong if PPI runs hot and drives the front end back up, twos repricing toward 4.25% and flattening 2s10s, the same break the morning note carried. The trade also assumes Treasury holds its bill pace and the refunding stays set with no coupon upsize; a surprise upsize takes it off. The other risk runs through oil: a verified Hormuz de-escalation rallies the long end and compresses the curve from the back. We keep the steepener and watch tomorrow's 30Y reopening for the concession the 10Y just showed.

Sources read

8 sources read

  • Commentary items: 8

Sources read

8 sources read

  • Commentary items: 8

Citations

  1. [1]headline +0.1% and core +0.2% m/m (July CPI headline rose 0.1% MoM and 3.4% YoY (down from 3.5% in June); Core CPI rose 0.2% MoM (as expected)) — Commentary · zerohedge.com
  2. [2]Core slowed to 2.48% YoY, a five-month low, and core services ex-shelter fell to 2.78%, the softest since September 2021 (annual growth slowing to 2.48%, lowest since February; SuperCore CPI (Core Services Ex Shelter) fell to 2.78% YoY, lowest since September 2021) — Commentary · zerohedge.com
  3. [3]Shelter eased to 3.18% YoY from 3.28% (Shelter inflation rose 3.18% YoY in July, down from 3.28% in June after 0.1% MoM increase) — Commentary · zerohedge.com
  4. [4]Front end traded bid on the print (if labor/supply data stays soft, front end holds bid even with tail risk of oil shock widening real rates) — Commentary · zerohedge.com
  5. [5]September hike odds are tumbling (Rate-hike odds are tumbling lower following the CPI print) — Commentary · zerohedge.com
  6. [6]energy dragged headline (Energy index declined 1.5% in July, serving as biggest deflationary driver; gasoline down 2.9% MoM) — Commentary · zerohedge.com
  7. [7]OER/rent still ran near +0.3% m/m (OER and rent were still +0.3% m/m, with PPI/claims tomorrow and August energy rebound risk keeping size modest) — Commentary · zerohedge.com
  8. [8]2Y closed 8/10 at 4.25% (4.25000000) — FRED DGS2 · Aug 10, 2026
  9. [9]0.48% on 8/11 (0.48000000) — FRED T10Y2Y · Aug 11, 2026
  10. [10]0.35% on 7/28 (0.35000000) — FRED T10Y2Y · Jul 28, 2026
  11. [11]0.83 on 8/07 (0.82570000) — FRED THREEFYTP10 · Aug 7, 2026
  12. [12]0.70 at end-June (0.69670000) — FRED THREEFYTP10 · Jun 30, 2026
  13. [13]the EIA now carries the shortfall through end-2027 (the US now expects oil supply disruptions ... to reach about 600,000 barrels per day through the end of next year) — Commentary · zerohedge.com
  14. [14]cleared at 4.683%, the highest auction yield since 2007 (10Y Treasury auction priced at 4.683% high yield ... Current 10Y auction yield is highest since 2007) — Commentary · zerohedge.com
  15. [15]the first tail since May, on a 2.53 bid-to-cover with 76.7% indirect (10Y auction price tailed the When Issued by approximately 1 bps, marking first tail since May; Bid-to-cover ratio of 2.532; Indirect bidders awarded 76.73%) — Commentary · zerohedge.com
  16. [16]10Y at 4.72% (4.72000000) — FRED DGS10 · Aug 10, 2026
  17. [17]30Y at 5.25% on 8/10 (5.25000000) — FRED DGS30 · Aug 10, 2026
  18. [18]SOFR fixed 3.64% on 8/11 (3.64000%) — NY Fed SOFR · Aug 11, 2026
  19. [19]IORB at 3.65% (3.65000000) — FRED IORB · Aug 12, 2026
  20. [20]EFFR at 3.63% (3.63000%) — NY Fed EFFR · Aug 11, 2026
  21. [21]3.50-3.75% target range (3.75000000 upper; DFEDTARL 3.50000000 lower) — FRED DFEDTARU · Aug 12, 2026
  22. [22]GCF Treasury printed 3.67% (UST 3.67000) — DTCC GCF repo · Aug 11, 2026
  23. [23]Reserves at $2.99T (2993349.00000000) — FRED WRESBAL · Aug 5, 2026
  24. [24]85.8bp versus the 5bp minimum (85.8 bp fee; $4.17B accepted) — Observation · observation:seclend_observations:912797TV9:2026-08-12
  25. [25]down from 153.8bp on 8/11 (153.8 bp fee; $4.09B accepted) — Observation · observation:seclend_observations:912797TV9:2026-08-11

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