Notes for Wed, Aug 26, 2026

Curve in 3bp since Friday, all out of the back end; front anchored, both break tests held, term premium near cycle high.

Curve

We hold the 2s10s steepener into this morning's PCE. The spread printed 47bp Tuesday^[1], in from 50bp at Friday's note^[2], and the 3bp came out of the long end: the 10Y richened to 4.70^[3], in from 4.74 Friday^[4], and the 30Y to 5.23^[5] from 5.27^[6], while the 2Y sits at 4.24^[7] and EFFR held 3.63^[8]. That is back-end buying after the 08-21 selloff, not a front-led cut repricing, so we treat it as profit-taking.

Both break tests on record held overnight. We see no refunding surprise on the calendar, so the coupon-upsize test is clear. The front-rally test would require the 2Y through 4.10 on a soft labor print; instead the 2Y is at 4.24 and rose into Friday. Term premium (Kim-Wright 10Y) sat at 0.868 Friday^[9], near its cycle high, consistent with the supply premium sitting in the back end where we've argued it belongs. Howell argues the case behind the trade: a Warsh Fed pushing issuance to bills and pinning the front through repo liquidity^[10] while nominal growth pulls the long end up^[11]. Our assumption that the buyback stays bill-financed and the coupon pace holds is intact.

Funding

SOFR fixed 3.65 Monday^[12], right at IORB 3.65^[13], with EFFR at 3.63: no scarcity signal, since SOFR is at the floor rather than above it. RRP take-up was just $0.4bn on 08-25^[14], so cash has left the facility and reserves are the marginal buffer. Reserves stood at $2.935T on 08-19^[15], down $8.8bn on the week^[16]; TGA was $936bn^[17], down $23bn w/w^[18]. GCF Treasury repo printed 3.68 on 08-25^[19], mid-range. On collateral, the 02/18/27 bill's SOMA lending fee reached 403.3bp on 08-19 versus the 5bp floor^[20], but that issue-specific demand cooled, with the top fee back to 8.2bp by 08-25^[21].

PCE

Core PCE for July prints at 8:30 ET, after we send, with the second GDP estimate in the same slot. This is the falsifier that matters this week: we're wrong on the steepener if PCE runs hot enough to bear-flatten the curve, front leading back. We re-baseline the front-end anchor if the 2Y breaks 4.35, our line for the front giving way. On the inflation read, the temporary beef tariff waiver flagged overnight is a price-management tool with limited pass-through^[22], so we would not lean on it for the core print.

Sources read

4 sources read

• Commentary items: 4

Sources read

4 sources read

• Commentary items: 4

Citations

1. [1]printed 47bp Tuesday (0.47) — FRED T10Y2Y · Aug 25, 2026
2. [2]in from 50bp at Friday's note (0.50) — FRED T10Y2Y · Aug 21, 2026
3. [3]richened to 4.70 (4.70) — FRED DGS10 · Aug 24, 2026
4. [4]in from 4.74 Friday (4.74) — FRED DGS10 · Aug 21, 2026
5. [5]the 30Y to 5.23 (5.23) — FRED DGS30 · Aug 24, 2026
6. [6]from 5.27 (5.27) — FRED DGS30 · Aug 21, 2026
7. [7]the 2Y sits at 4.24 (4.24) — FRED DGS2 · Aug 24, 2026
8. [8]EFFR held 3.63 (3.63) — NY Fed EFFR · Aug 24, 2026
9. [9]sat at 0.868 Friday (0.86820) — FRED THREEFYTP10 · Aug 21, 2026
10. [10]a Warsh Fed pushing issuance to bills and pinning the front through repo liquidity (A Warsh-led Fed can loosen monetary conditions without cutting the Fed funds rate by managing Treasury bill issuance, reserve levels, and bank balance sheets) — Commentary · capitalwars.substack.com
11. [11]nominal growth pulls the long end up (Nominal growth (NGDP) is pulling bond yields higher) — Commentary · capitalwars.substack.com
12. [12]SOFR fixed 3.65 Monday (3.65) — NY Fed SOFR · Aug 24, 2026
13. [13]right at IORB 3.65 (3.65) — FRED IORB · Aug 26, 2026
14. [14]RRP take-up was just $0.4bn on 08-25 (0.405) — FRED RRPONTSYD · Aug 25, 2026
15. [15]Reserves stood at $2.935T on 08-19 (2,935,287M) — FRED WRESBAL · Aug 19, 2026
16. [16]down $8.8bn on the week (-8,772M w/w) — FRED WRESBAL · Aug 19, 2026
17. [17]TGA was $936bn (936,406M) — Treasury General Account · Aug 19, 2026
18. [18]down $23bn w/w (-22,999M w/w) — Treasury General Account · Aug 19, 2026
19. [19]GCF Treasury repo printed 3.68 on 08-25 (UST 3.677) — DTCC GCF repo · Aug 25, 2026
20. [20]reached 403.3bp on 08-19 versus the 5bp floor (403.3 bp) — Observation · observation:seclend_observations:912797TV9:2026-08-19
21. [21]with the top fee back to 8.2bp by 08-25 (8.2 bp) — Observation · observation:seclend_observations:912797VU8:2026-08-25
22. [22]the temporary beef tariff waiver flagged overnight is a price-management tool with limited pass-through (Tariff waiver on 300k mt of ground beef is a political price-management tool, not a structural inflation fix) — Commentary · zerohedge.com

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