Short Rates Desk
Thu, Aug 13, 2026

Notes for Thu, Aug 13, 2026

Morning brief

· generated 07:07 ET

Stay in the 2s10s steepener; today's PPI is the only thing that breaks it

July CPI printed 0.1% headline, 0.2% core, so the front end held; the steepener is a term-premium move and today's PPI is the test.

Curve

We stay in the 2s10s steepener. Wednesday's 10Y auction stopped at 4.683%, the highest yield since 2007 and roughly 10bp above last month's 4.580%[1], tailed the when-issued by 0.1bp[2], and the bid-to-cover slipped to 2.53 from 2.59[3]. Twos barely moved through the print and the auction: DGS2 at 4.22% on 8/11[4] against 4.19% on 8/7[5], while 10Y pushed to 4.70%[6] from 4.65%[7] and 30Y sat at 5.24%[8]. That is a bear steepener carried by term premium at the long end, with 2s10s at 48bp[9] versus 35bp on 7/28[10].

Our standing break test was to be wrong if a hot CPI lifted 2Y back through 4.19%. It did not fire. July CPI came in soft at 0.1% on the month and 3.4% on the year, core 0.2% and 2.5%[11], and futures now price roughly a 55% chance the Fed holds in September[12]. We read the steepening as term premium at the long end, not front-end easing: EFFR is pinned at 3.63%[13] inside a 3.50-3.75% target[14], and the July FOMC split 9-3 with Logan, Hammack and Kashkari dissenting for hikes[15]. The live policy risk is a hike, so the 2Y break level is a hike-pricing level.

Today brings the only real test. PPI and jobless claims print at 8:30am ET and Treasury auctions the 30-year bond this afternoon[18], hitting both legs of the trade at once. Boockvar flags July PPI running about 160bp above CPI at the wholesale level[16], and Lacy Hunt has cut duration into bills[17], calling a structural shift up in the inflation floor. We're wrong if PPI runs hot and drags 2Y toward 4.25%, flattening 2s10s, the same break the close note carried; a weak 30Y stop instead extends the steepener. The trade assumes Treasury holds its bill pace and the refunding stays set, and Constan's scenario of floating the bill share up a trillion[19] is a tail we are not paying for.

Funding

Funding is calm and the cash assumption holds. SOFR last fixed at 3.64%[20] (8/11), a basis point under IORB at 3.65%[21], so there is no broad funding pressure even with the RRP essentially empty at $0.7B on 8/12[22]; cash has drained from the facility without stress. Reserves held near $2.99T on 8/5[23]. One issue is rich: the SOMA lending fee on the Feb-18-27 bill (912797TV9) printed 85.8bp against the 5bp minimum on 8/12[24], down from 153.8bp the day before[25]. That is issue-specific collateral demand and it eased into the print; it says nothing about GC, which is trading calm.

Sources read

8 sources read

  • Commentary items: 8

Citations

  1. [1]the highest yield since 2007 and roughly 10bp above last month's 4.580% (high yield ... 4.683% ... the highest since 2007 ... previous month's ... priced at just 4.580%) — Web · finance.biggo.com
  2. [2]tailed the when-issued by 0.1bp (High yield 4.683% WI 4.682% Tail 0.1 basis points) — Web · louisvelazquez.com
  3. [3]the bid-to-cover slipped to 2.53 from 2.59 (bid-to-cover ratio slipped to 2.53 from 2.59, signaling cooling demand momentum) — Web · finance.biggo.com
  4. [4]DGS2 at 4.22% on 8/11 (4.22) — FRED DGS2 · Aug 11, 2026
  5. [5]4.19% on 8/7 (4.19) — FRED DGS2 · Aug 7, 2026
  6. [6]10Y pushed to 4.70% (4.70) — FRED DGS10 · Aug 11, 2026
  7. [7]from 4.65% (4.65) — FRED DGS10 · Aug 7, 2026
  8. [8]30Y sat at 5.24% (5.24) — FRED DGS30 · Aug 11, 2026
  9. [9]2s10s at 48bp (0.48) — FRED T10Y2Y · Aug 12, 2026
  10. [10]35bp on 7/28 (0.35) — FRED T10Y2Y · Jul 28, 2026
  11. [11]July CPI came in soft at 0.1% on the month and 3.4% on the year, core 0.2% and 2.5% (core CPI rose 0.2%. On an annual basis, the inflation rates were 3.4% and 2.5%, both down 0.1 percentage point from June) — Web · cnbc.com
  12. [12]futures now price roughly a 55% chance the Fed holds in September (Futures markets price roughly a 55% chance the Fed holds rates steady) — Web · babypips.com
  13. [13]EFFR is pinned at 3.63% (3.63) — NY Fed EFFR · Aug 11, 2026
  14. [14]3.50-3.75% target (DFEDTARU 3.75 (upper); DFEDTARL 3.50 (lower)) — FRED DFEDTARU · Aug 12, 2026
  15. [15]the July FOMC split 9-3 with Logan, Hammack and Kashkari dissenting for hikes (FOMC decision was 9-3 no hike; three dissenting votes for hikes came from Lorie Logan, Beth Hammack, and Neel Kashkari) — Commentary · peterboockvar.substack.com
  16. [16]Boockvar flags July PPI running about 160bp above CPI at the wholesale level (For July...headline PPI is expected to be 160 bps above CPI) — Commentary · peterboockvar.substack.com
  17. [17]Lacy Hunt has cut duration into bills (Hoisington Investment Management... sharply reduced their clients' bond duration and put the proceeds in Treasury bills) — Commentary · zerohedge.com
  18. [18]Treasury auctions the 30-year bond this afternoon (30-Year BOND ... Thursday, August 13, 2026 ... Monday, August 17, 2026) — Web · home.treasury.gov
  19. [19]Constan's scenario of floating the bill share up a trillion (Going from 21.5% bills to 25% bills would be roughly 1TN more bills and 1TN less duration) — Commentary · dampedspring101.substack.com
  20. [20]SOFR last fixed at 3.64% (3.64) — NY Fed SOFR · Aug 11, 2026
  21. [21]IORB at 3.65% (3.65) — FRED IORB · Aug 13, 2026
  22. [22]RRP essentially empty at $0.7B on 8/12 (0.725) — FRED RRPONTSYD · Aug 12, 2026
  23. [23]Reserves held near $2.99T on 8/5 (2,993,349M) — FRED WRESBAL · Aug 5, 2026
  24. [24]printed 85.8bp against the 5bp minimum on 8/12 (85.8 bp) — Observation · observation:seclend_observations:912797TV9:2026-08-12
  25. [25]down from 153.8bp the day before (153.8 bp) — Observation · observation:seclend_observations:912797TV9:2026-08-11

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

Close brief

· generated 16:20 ET

PPI printed soft and the 30Y tailed; we stay in the 2s10s steepener

Neither break test tripped: disinflationary July PPI kept the front bid, the long-end auction concession cheapened duration, and funding held calm.

Positioning

We stay in the 2s10s steepener and would add into the long-end concession. Both break tests on record keyed on 2Y dragging the curve flatter, and neither fired. 2s10s widened to 48bp on 08-12[1] from 46bp on 08-07[2] even as 2Y firmed to 4.22% on 08-11[3] from 4.19% on 08-07[4]; the curve bear-steepened on long-end supply, the opposite of the flattening both tests were written to catch. Yesterday's in-line CPI[5] and today's soft PPI removed the hawkish front-end impulse either test needed: July PPI came flat at the headline with core up 0.2% against 0.3% expected[6].

The steepening reflects term premium, not front-end repricing. The NY Fed's 10Y term-premium estimate stood at 0.83% on 08-07[7], up from 0.75% a month earlier[8]. With the target range held at 3.50-3.75%[9], the front trades off the September hike-odds debate, and traders trimmed those odds on the soft PPI.

30Y auction

Treasury's $25bn 30Y tailed[10], stopping at 5.216% against a 5.212% when-issued[11], the highest auction yield since 2001[12], with bid-to-cover easing to 2.39 from 2.44 in July[13] and dealers left holding 11.5%[14]. ZeroHedge framed this as long-end sponsorship disappearing; we read it as a mild concession. The stop was 0.4bp cheap by our arithmetic on the when-issued, well short of the 4bp the headline implied, and indirects at 66.9% sat essentially on the six-auction average of 67.0%[15]. That cheapens duration and feeds the steepener, the leg the morning brief named as extending the trade.

Funding

Funding held calm, which keeps our cash assumption intact. SOFR fixed at 3.62% on 08-12[16], 3bp under IORB at 3.65%[17], with EFFR at 3.63%[18]; that gap points to ample reserves and banks staying out of repo. The one genuinely special issue, the Feb-18-27 bill, cooled: its SOMA lending fee fell to 71.4bp on 08-13[19] from 153.8bp on 08-11[20] against the 5bp program minimum, so demand for that single CUSIP is easing. TGA closed at $929bn on 08-05[21], down $41bn on the week[22], leaving Treasury ample cash and the bill-pace assumption in place.

Into retail sales

Retail sales tomorrow is the live catalyst. A hot print that lifts 2Y through 4.25% is the trade's out: it pushes September hike odds back up, marked near 40% from 48% earlier[23], and flattens 2s10s. A soft print more likely bull-steepens as the front rallies on growth worry, which extends us. We're wrong if retail sales runs hot and 2Y closes through 4.25%. We re-baseline if Treasury moves the bill pace, though nothing in today's calendar points that way. Private-credit nonaccruals at multi-year highs[24] are a slow burn; with initial claims at 209k[25] we don't express it on the short end here.

Sources read

8 sources read

  • Commentary items: 8

Citations

  1. [1]2s10s widened to 48bp on 08-12 (0.48) — FRED T10Y2Y · Aug 12, 2026
  2. [2]from 46bp on 08-07 (0.46) — FRED T10Y2Y · Aug 7, 2026
  3. [3]2Y firmed to 4.22% on 08-11 (4.22) — FRED DGS2 · Aug 11, 2026
  4. [4]from 4.19% on 08-07 (4.19) — FRED DGS2 · Aug 7, 2026
  5. [5]Yesterday's in-line CPI (Yesterday's in-line US CPI report was the non-event its relative insignificance vs tumultuous domestic and global backdrops suggested it should be.) — Commentary · zerohedge.com
  6. [6]July PPI came flat at the headline with core up 0.2% against 0.3% expected (Headline PPI flat MoM, core +0.2% vs +0.3% expected) — Commentary · zerohedge.com
  7. [7]The NY Fed's 10Y term-premium estimate stood at 0.83% on 08-07 (0.8257) — FRED THREEFYTP10 · Aug 7, 2026
  8. [8]up from 0.75% a month earlier (0.7531) — FRED THREEFYTP10 · Jul 7, 2026
  9. [9]the target range held at 3.50-3.75% (3.50 lower bound, 3.75 upper bound) — FRED DFEDTARL · Aug 13, 2026
  10. [10]Treasury's $25bn 30Y tailed ($25bn 30yr auction at highest yield since 2001) — Commentary · zerohedge.com
  11. [11]stopping at 5.216% against a 5.212% when-issued (priced at 5.216%, tailing the When Issued 5.212%) — Commentary · zerohedge.com
  12. [12]the highest auction yield since 2001 (Auction yield is highest since 2001 (25 year high)) — Commentary · zerohedge.com
  13. [13]bid-to-cover easing to 2.39 from 2.44 in July (Bid to cover was 2.392, down from 2.444 in July) — Commentary · zerohedge.com
  14. [14]dealers left holding 11.5% (Dealers left holding 11.5%, 150 bps higher than July) — Commentary · zerohedge.com
  15. [15]indirects at 66.9% sat essentially on the six-auction average of 67.0% (Indirects fell to 66.9% from 77.7% in July, just below the six-auction average of 67.0%) — Commentary · zerohedge.com
  16. [16]SOFR fixed at 3.62% on 08-12 (3.62) — NY Fed SOFR · Aug 12, 2026
  17. [17]3bp under IORB at 3.65% (3.65) — FRED IORB · Aug 13, 2026
  18. [18]with EFFR at 3.63% (3.63) — NY Fed EFFR · Aug 12, 2026
  19. [19]its SOMA lending fee fell to 71.4bp on 08-13 (71.4 bp) — Observation · observation:seclend_observations:912797TV9:2026-08-13
  20. [20]from 153.8bp on 08-11 (153.8 bp) — Observation · observation:seclend_observations:912797TV9:2026-08-11
  21. [21]TGA closed at $929bn on 08-05 (929,325M) — Treasury General Account · Aug 5, 2026
  22. [22]down $41bn on the week (-41,117M w/w) — Treasury General Account · Aug 5, 2026
  23. [23]marked near 40% from 48% earlier (September hike probability down to 40% from 48%) — Commentary · zerohedge.com
  24. [24]Private-credit nonaccruals at multi-year highs (nonaccruals at Ares/Golub/Blue Owl/Blackstone hit 5yr+ highs) — Commentary · zerohedge.com
  25. [25]initial claims at 209k (Initial claims pop to 209k on Michigan/New York state-level noise) — Commentary · zerohedge.com

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