TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 12 TICKS HIGHER AT 108-29+
Treasury curve bull steepens after soft PPI raises September hold expectations. At settlement, 2-year -6.1bps at 4.140%, 3-year -6.3bps at 4.211%, 5-year -6.5bps at 4.315%, 7-year -6.3bps at 4.462%, 10-year -4.9bps at 4.639%, 20-year -5.2bps at 5.202%, 30-year -4.3bps at 5.210%.
THE DAY: The Treasury curve bull steepened on Thursday following another softer-than-expected inflation report. Headline PPI was unchanged M/M in July, below expectations for a 0.2% increase and following the 0.3% decline in June. The Y/Y rate eased to 4.7% from 5.5%, below the 4.9% forecast. Core PPI rose 0.2% M/M, below the 0.3% consensus and slowing from the prior 0.4% increase, while the Y/Y rate cooled to 4.2% from 4.7%, in line with expectations. Overall, another softer-than-expected inflation report bolstered expectations for the Fed to remain on hold in September, with CME FedWatch pricing the probability of a hold at around 68%, up from 60% following CPI and 50% at the start of the week.
Fed speak was mixed. Barkin said it remains an open question whether the Fed will need to raise rates or whether price pressures are already on a sustainable path lower, adding that many officials believe current rates are already restrictive enough to bring inflation down. However, he later acknowledged that it is difficult to know whether policy is actually restrictive given the uncertainty surrounding economic models. Hammack, meanwhile, largely reiterated her hawkish stance, again arguing that rates should be raised now. She described the labour market as stable but acknowledged that inflation has risen amid recent shocks.
Elsewhere, there were few fresh geopolitical developments, while crude saw two-way trade and ultimately settled lower. Iran said talks with Oman are ongoing and progressing positively, with advances made on several levels. However, tensions in the region remain elevated, with the Houthis claiming to have targeted an Aramco refinery in Saudi Arabia's Jizan with two drones.
The 30-year auction was soft, with the 0.4bps tail, below-average bid-to-cover and above-average dealer allocation all pointing to weaker demand despite the considerably higher outright yield on offer.
SUPPLY
Notes/Bonds
- US sold USD 25bln of 30-yr bonds.
- US to sell USD 16bln of 20-year bonds on August 19th and USD 8bln of 30-year TIPS on August 20th; all to settle August 31st
Bills
- US sold 4-week bills at a high rate of 3.625%, B/C 2.77x; sold 8-week bills at a high rate of 3.665%, B/C 2.85x
- US to sell USD 95bln of 6-week bills on August 18th on August 18th, USD 92bln of 13-week bills and USD 79bln of 26-week bills on August 17th; all to settle August 20th.
STIRS / OPERATIONS
- Fed Hike Pricing via CME Fed Watch: Sept 8.1bps (prev. 10bps), Dec 23.1bps (prev 27.1bps).
- EFFR at 3.63% (prev. 3.63%), volumes at USD 106bln (prev. USD 109bln) on August 12th
- SOFR at 3.62% (prev. 3.64%), volumes at USD 2.943tln (prev. USD 2.961tln) on August 12th
- NY Fed RRP op demand at 0.45bln (prev. 0.725bln) across 1 counterparties (prev. 1) on August 13th
A bull steepening on a soft producer price print follows the familiar pattern of front-end-led rallies when the data validate the hold camp ahead of a live policy meeting: the 2s10s spread widens because the short end prices the on-hold path with more conviction while the long end remains hostage to supply and term premium, as the soft long-bond auction here attests. The distinction worth drawing is between duration demand driven by disinflation, which lifts the whole curve, and demand at the long end specifically, which weak auction metrics and a heavy coupon calendar have repeatedly capped even on dovish days. Mixed Fed commentary of this kind, with one official stressing restrictive-enough rates and another arguing for more tightening, typically leaves the front end anchored to the data rather than to any single speaker, and raises the sensitivity of the next labour and inflation prints in the run-up to the meeting. The soft long-end auction alongside a rally is a recurring tell that concession and supply, not macro, are setting the back end; the announced 20-year and TIPS supply in the coming sessions is the immediate follow-on. Geopolitical noise around Gulf energy infrastructure has historically mattered for the curve only insofar as it feeds the inflation side of the reaction function via crude, which settled lower on the day.