TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 2 TICKS HIGHER AT 108-17+
Treasuries little changed after an in-line CPI report sees traders boost bets for a September hold. At settlement, 2-year -2.5bps at 4.197%, 3-year -2.2bps at 4.270%, 5-year -2.1bps at 4.373%, 7-year -1.7bps at 4.521%, 10-year -1.2bps at 4.682%, 20-year -0.7bps at 5.248%, 30-year +0.1bps at 5.248%.
THE DAY: Treasuries ultimately settled little changed on CPI day, despite the report seeing markets increase expectations for the Fed to remain on hold in September. Headline CPI rose 0.1% M/M, in line with expectations and rebounding from the 0.4% decline in June, which had been driven by a notable 5.7% drop in energy prices. The Y/Y rate eased to 3.4% from 3.5%, also matching forecasts. Core CPI rose 0.2% M/M, in line with consensus and accelerating from June's unchanged reading, while the Y/Y rate cooled to 2.5% from 2.6%, as expected. Overall, the report was welcome, with both annual inflation measures ticking lower and no upside surprise in the monthly core reading. Money markets subsequently increased the probability of an unchanged September FOMC decision to around 60% from 50% beforehand, with the weak July jobs report also keeping the case for patience firmly in play.
Treasuries saw two-way price action immediately after the release, with the curve eventually bull steepening as the long-end lagged. Risks of a September hike clearly remain, but participants will continue to scrutinise incoming data ahead of the September 16th FOMC for clearer direction.
Elsewhere, the 10-year note auction produced a similar result to Tuesday's 3-year offering: demand was not as strong as at the previous auction but remained better than average. The marginal 0.1bps tail took some shine off the result, but the above-average bid-to-cover, strong indirect participation and below-average dealer allocation pointed to healthy underlying demand for duration. Direct participation also improved notably from the prior auction, helping offset some of the decline in indirect demand.
Attention on Thursday turns to US PPI, before the 30-year bond auction later in the session.
SUPPLY
Notes/Bonds
- US sold USD 42bln of 10-yr notes; Tail 0.1bps
- US to sell USD 25bln of 30yr on August 13th; all settling on August 17th
Bills
- US sold 17-wk bills at high-rate 3.755%, B/X 3.16x
- US to sell USD 110bln of 4-wk bills and USD 100bln 8-wk bills on August 13th; all to settle August 18th
STIRS / OPERATIONS
- Fed Hike Pricing via CME Fed Watch: Sept 10bps (prev. 12.5bps), Dec 27.1bps (prev 29.5bps).
- EFFR at 3.63% (prev. 3.63%), volumes at USD 109bln (prev. USD 108bln) on August 11th
- SOFR at 3.64% (prev. 3.63%), volumes at USD 2.961tln (prev. USD 2.964tln) on August 11th
- NY Fed RRP op demand at 0.72bln (prev. 1.25bln) across 1 counterparties (prev. 2) on August 12th
An in-line CPI print producing a negligible settlement is a familiar pattern: when the monthly data matches consensus, the repricing work happens in the policy odds rather than in cash yields, and here the adjustment ran through September hold probabilities rather than through the curve itself. The bull-steepening bias into the close, with the front end leading and the long end lagging, is the standard shape when markets lean toward patience at the front while term premium keeps the back end anchored. The 10-year auction result fits the usual mid-cycle refunding template: a marginal tail with above-average indirect participation and a thin dealer allocation is read as adequate rather than strong, and such results rarely move the market beyond the immediate post-auction fade. The distinction worth drawing is between the data path and the supply path: PPI and the 30-year auction are the next scheduled catalysts, and long-bond supply into a soft long end is where tails have historically been more punishing than in the belly. Wraps of this kind are descriptive by construction; the signal sits in the divergence between rate expectations and curve shape, which here remains modest.