Short Rates Desk
Tue, Aug 18, 2026

Notes for Tue, Aug 18, 2026

Morning brief

· generated 07:04 ET

We keep the 2s10s steepener into Wednesday's 20yr auction and FOMC minutes

2s10s printed a fresh 53bp with the 2Y at 4.17%; the break test on record held and the steepener stays on.

Curve

We keep the 2s10s steepener. The break test on record needed the 2Y to close through 4.25%; it didn't, printing 4.17% Friday[1]. 2s10s reached 53bp on the 17th[2], a fresh high, up from 51bp Friday[3]. The steepening since late July is term premium: dealers are selling the long end on fiscal supply, AI-driven capital demand, and higher oil, while the front end stays anchored by a Fed on hold and last week's tame CPI and PPI. DB pegs the 2s10s move at +20bp since July 28[4], and Bianco's point that real rates near 3% are the binding constraint[5], with cut timing already settled, supports that front-end anchor.

The alternate read is a hawkish shock, the Fed actually hiking, which would flatten rather than steepen. The 2Y hasn't moved with the long end, so we attribute the selloff to term premium instead of a policy repricing. Wednesday tests that: the 20yr auction, which DB flags could be the most expensive Treasury bond issuance in 25 years[6], and the July FOMC minutes, which follow a meeting that drew three dissents in favor of a hike[7]. We're wrong if the minutes read hawkish enough to push the 2Y through 4.25% and flatten the trade.

Funding

The RRP is essentially empty: take-up was $255M on the 17th[8], down from $975M a week earlier[9]. Reserves fell to $2.944T on the 12th[10] from $2.993T the week prior[11], roughly a $49B drain[12], as the TGA built to $959B on the 12th[13] from $929B the week before[14]. SOFR fixed 3.62% Friday[15], 3bp below IORB at 3.65%[16], so funding is still soft and there's no scarcity signal here. The cushion that used to absorb Treasury's cash builds is gone, so the next large settlement lands on reserves directly; we'd watch SOFR firming toward IORB from here.

One issue is working special: the Feb 2027 bill (912797TV9) lending fee ran to 181bp over the 5bp SOMA floor[17] on the 17th. That reads as issue-specific collateral demand rather than a broad funding signal.

Global and risks

China's July activity missed across the board: industrial production slowed to 4.5% year-on-year from 5.3%[18], fixed-asset investment contracted harder[19], and retail sales growth eased[20]. That's a disinflationary impulse that supports reading the long-end selloff as supply and term premium rather than a fresh inflation scare. Vance framing US Iran policy around energy-cost containment[21] keeps a lid on the oil premium, which works the same direction: lower long-end real yields, steeper curve.

Two structural flags we're carrying rather than trading. Gromen argues the foreign UST bid is more fragile than the ~$9T headline suggests[22], with much of it synthetic and reserve holders reaching for swap lines over sales in a squeeze, a long-end tail if a vol event hits. And the BoJ has hiked five times with a sixth flagged for next month[23], a JPY carry-unwind and cross-currency risk with no direct US front-end trigger yet.

The trade assumes Treasury holds its bill-financed path, so the long-end supply mix stays put; Wednesday's 20yr sits inside that plan. We re-baseline if the refunding mix tilts to coupons.

Sources read

4 sources read

  • Commentary items: 4

Citations

  1. [1]printing 4.17% Friday (4.17) — FRED DGS2 · Aug 14, 2026
  2. [2]2s10s reached 53bp on the 17th (0.53) — FRED T10Y2Y · Aug 17, 2026
  3. [3]up from 51bp Friday (0.51) — FRED T10Y2Y · Aug 14, 2026
  4. [4]DB pegs the 2s10s move at +20bp since July 28 (The 2s10s slope has steepened by +20bps since July 28, its sharpest 13-session rise since the post-Liberation Day Treasury sell off last April.) — Commentary · zerohedge.com
  5. [5]Bianco's point that real rates near 3% are the binding constraint (Real rates at 3% is the actual constraint worth debating; whether that's restrictive depends on terminal r* and growth expectations) — Commentary · twitter.com
  6. [6]the most expensive Treasury bond issuance in 25 years (this week's 20yr Treasury auction (Wednesday) may become the most expensive Treasury bond issuance in the past 25 years) — Commentary · zerohedge.com
  7. [7]three dissents in favor of a hike (three dissents in favor of a 25bps hike) — Commentary · zerohedge.com
  8. [8]take-up was $255M on the 17th (0.255) — FRED RRPONTSYD · Aug 17, 2026
  9. [9]down from $975M a week earlier (0.975) — FRED RRPONTSYD · Aug 10, 2026
  10. [10]Reserves fell to $2.944T on the 12th (2,944,059M) — FRED WRESBAL · Aug 12, 2026
  11. [11]from $2.993T the week prior (2,993,349M) — FRED WRESBAL · Aug 5, 2026
  12. [12]roughly a $49B drain (-49,290M w/w) — FRED WRESBAL · Aug 12, 2026
  13. [13]the TGA built to $959B on the 12th (959,405M) — Treasury General Account · Aug 12, 2026
  14. [14]from $929B the week before (929,325M) — Treasury General Account · Aug 5, 2026
  15. [15]SOFR fixed 3.62% Friday (3.62) — NY Fed SOFR · Aug 14, 2026
  16. [16]IORB at 3.65% (3.65) — FRED IORB · Aug 18, 2026
  17. [17]181bp over the 5bp SOMA floor (181.0 bp) — Observation · observation:seclend_observations:912797TV9:2026-08-17
  18. [18]industrial production slowed to 4.5% year-on-year from 5.3% (Industrial production (IP) growth slowed to 4.5% yoy in July from 5.3% yoy in June) — Commentary · zerohedge.com
  19. [19]fixed-asset investment contracted harder (Fixed asset investment (FAI) growth fell to -12.8% yoy in July from -9.3% yoy in June) — Commentary · zerohedge.com
  20. [20]retail sales growth eased (Retail sales growth eased to +0.6% yoy from +1.0% yoy in June) — Commentary · zerohedge.com
  21. [21]Vance framing US Iran policy around energy-cost containment (Vance signals energy-cost containment as the primary Iran policy lever, not nuclear non-proliferation) — Commentary · twitter.com
  22. [22]the foreign UST bid is more fragile than the ~$9T headline suggests (~$9T foreign holdings (25% of float), but composition is synthetic) — Commentary · twitter.com
  23. [23]the BoJ has hiked five times with a sixth flagged for next month (Japan's BoJ has already tightened 5x over two years with a 6th hike flagged for next month) — Commentary · twitter.com

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

Close brief

· generated 16:20 ET

We keep the 2s10s steepener as the long end reprices term premium and the front stays anchored

Front-end rates anchored while the long end sells off on term premium; reserves down $49bln but orderly, FOMC minutes Wednesday the catalyst.

Curve

We keep the 2s10s steepener, and today's price action ran our way. The long end sold off while the front sat still, the term-premium steepening the trade is built on. The 30yr printed 5.32%, a 19-year high, with 2s30s out to 113bp on desk commentary[1]. Against that the front barely moved: EFFR fixed at 3.63% on the 17th[2], and the 2Y closed Friday at 4.17%[3]. A Fed-path shock moves the front with the back; this session didn't, so we read it as term premium and keep the steepener on.

Both break tests from this morning held. The 2Y needed to close through 4.25% to flatten the trade and take us out; it printed 4.17% and never moved with the long end. The re-baseline needed the supply mix to tilt to coupons; Treasury ran bills today, $84.8bln 6-month and $98.7bln 3-month with $37.4bln net new cash tomorrow[4], and no coupon upsize. The assumptions carry.

Long end

Three drivers are pushing the long end, and none is the funds rate. Foreign official demand keeps fading: TIC data showed a $72.1bln monthly outflow with Japan and China both sellers in June[5], and foreign central bank net selling runs $233bln since late February on desk estimates[6]. Fiscal term premium is repricing across high-debt sovereigns, with Japan, the UK and France leading 10y10y forwards higher over the past week[7]. The Hormuz risk premium bid this session on escalation headlines[8], which feeds the inflation leg if crude breaks higher.

The alternate read is a hawkish terminal-rate repricing, which would flatten the curve by dragging the front up. We reject it on the front-end fixings: SOFR firmed only to 3.66% on the 17th[9], and the 2Y held its level. Hawkish Fed-path moves don't leave the front anchored. We're wrong if Wednesday's minutes push the 2Y through 4.25% and pull the front up with the long end, or if Treasury tilts the next refunding to coupons. Goldman's delta desk floating Fed hikes into a bond selloff is the tail that would do it[21], and we keep the hawkish front-end expression light until OIS confirms.

Funding

Funding firmed at the margin with no stress. SOFR fixed at 3.66% on the 17th[10], up from 3.62% Friday[11] and a basis point over IORB at 3.65%[12], while GCF Treasury repo printed 3.685%[13]. Reserves fell to $2.944trln in the week to the 12th[14], down $49.3bln on the week[15], and the TGA closed at $959.4bln[16], up $30.1bln[17]. Balances at that level are still ample and the drain is orderly. One bill is trading rich: the Feb 18 2027 issue drew a 253.6bp SOMA lending fee versus the 5bp minimum[18], up from 181bp a day earlier[19], but that reflects collateral demand for one specific issue while the broad funding picture stays calm.

FOMC minutes

The July minutes drop Wednesday at 18:00 UTC and are the next real catalyst. We read them for terminal-rate language and for any sign Waller softened toward a cut, the vote the market treats as marginal[20]. Dovish minutes would firm the front and flatten our steepener from the short-rate side; hawkish higher-for-longer language would extend the term-premium selloff and steepen it further. The minutes move positioning while the supply path stays set by the refunding calendar, so the coupon question waits for the next announcement.

Sources read

2 sources read

  • Commentary items: 2

Sources read

2 sources read

  • Commentary items: 2

Citations

  1. [1]The 30yr printed 5.32%, a 19-year high, with 2s30s out to 113bp on desk commentary (30yr UST now 5.32%, highest since 2007, with 2s30s steepener at 113bps) — Commentary · zerohedge.com
  2. [2]EFFR fixed at 3.63% on the 17th (3.63000%) — NY Fed EFFR · Aug 17, 2026
  3. [3]the 2Y closed Friday at 4.17% (4.17) — FRED DGS2 · Aug 14, 2026
  4. [4]$84.8bln 6-month and $98.7bln 3-month with $37.4bln net new cash tomorrow (auctioning $84.8bln 6m and $98.7bln 3m today with $37.4bln net cash raising tomorrow) — Commentary · conks.plumbing
  5. [5]TIC data showed a $72.1bln monthly outflow with Japan and China both sellers in June (Japan and China both sellers in June, with TIC data showing $72.1b outflow month-over-month) — Commentary · peterboockvar.substack.com
  6. [6]foreign central bank net selling runs $233bln since late February on desk estimates (Foreign CB net selling of $233b since late Feb, led by Japan (-$123b) and China (-$61b)) — Commentary · twitter.com
  7. [7]Fiscal term premium is repricing across high-debt sovereigns, with Japan, the UK and France leading 10y10y forwards higher over the past week (Term premia breaking out in high-debt sovereigns, Japan, UK, France leading the move higher in 10y10y forwards over the past week) — Commentary · robinjbrooks.substack.com
  8. [8]The Hormuz risk premium bid this session on escalation headlines (Hormuz risk premium bid sharply on escalation theater, tanker hit, UAE missile alert) — Commentary · zerohedge.com
  9. [9]SOFR firmed only to 3.66% on the 17th (3.66000%) — NY Fed SOFR · Aug 17, 2026
  10. [10]SOFR fixed at 3.66% on the 17th (3.66000%) — NY Fed SOFR · Aug 17, 2026
  11. [11]up from 3.62% Friday (3.62000%) — NY Fed SOFR · Aug 14, 2026
  12. [12]a basis point over IORB at 3.65% (3.65000000) — FRED IORB · Aug 18, 2026
  13. [13]GCF Treasury repo printed 3.685% (UST 3.68500) — DTCC GCF repo · Aug 17, 2026
  14. [14]Reserves fell to $2.944trln in the week to the 12th (2,944,059M) — FRED WRESBAL · Aug 12, 2026
  15. [15]down $49.3bln on the week (-49,290M w/w) — FRED WRESBAL · Aug 12, 2026
  16. [16]the TGA closed at $959.4bln (959,405M) — Treasury General Account · Aug 12, 2026
  17. [17]up $30.1bln (+30,080M w/w) — Treasury General Account · Aug 12, 2026
  18. [18]the Feb 18 2027 issue drew a 253.6bp SOMA lending fee versus the 5bp minimum (912797TV9 (B 02/18/27) at 253.6 bp) — Observation · observation:seclend_observations:912797TV9:2026-08-18
  19. [19]up from 181bp a day earlier (912797TV9 (B 02/18/27) at 181.0 bp) — Observation · observation:seclend_observations:912797TV9:2026-08-17
  20. [20]any sign Waller softened toward a cut, the vote the market treats as marginal (market perception that Waller is the marginal voter on hold vs. cut) — Commentary · twitter.com
  21. [21]Goldman's delta desk floating Fed hikes into a bond selloff is the tail that would do it (Goldman's delta desk calling for potential Fed hikes into a bond selloff is a risk-off signal) — Commentary · twitter.com

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