TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 2+ TICKS LOWER AT 108-18+
T-notes little changed ahead of Warsh. At settlement, 2-year +2.1bps at 4.230%, 3-year +2.6bps at 4.295%, 5-year +3.4bps at 4.394%, 7-year +3.0bps at 4.518%, 10-year +2.1bps at 4.670%, 20-year +1.9bps at 5.184%, 30-year +1.7bps at 5.189%.
THE DAY: Treasury yields were little changed across the curve on Thursday, rising between 0-3bps. Oil prices extended Wednesday's gains, although there was little follow-through into Treasuries, with participants likely turning their attention to Fed Chair Warsh's remarks on Friday. Yields saw some upside tracking oil higher after the WSJ reported that the US has no intention on returning to the MoU initially signed with Iran in June.
Economic data saw the advance goods trade deficit widen by more than expected, with capital goods imports surging amid strong AI-related demand, while industrial supplies exports declined on weaker oil exports. Meanwhile, jobless claims remained low, consistent with a steady, low-hire, low-fire labour market.
With Jackson Hole underway, focus now turns to Fed Chair Warsh on Friday. In the meantime, Schmid said he probably would have supported a hike in July, noting that inflation remains stubborn and sticky and that it is unclear how restrictive Fed policy currently is. Hammack reiterated that now is the time to act and said she does not view current policy as restrictive for the economy, although she noted that she enters every meeting with an open mind. Collins said she believes policy is restrictive enough and will likely lead to disinflation, but if disinflation is not seen, rate increases would be warranted.
The 7-year auction was broadly in line with recent averages, stopping on the screws, compared with the prior and six-auction average 0.2bp tails. Direct participation jumped notably, although this was offset by a decline in indirect demand, leaving dealers with a roughly average takedown. Overall, the higher outright yield on offer likely provided some support, although the auction was ultimately fairly average - whereas the 2- and 5-year auctions this week saw lower outright yields vs July but remained strong.
Note, the last two sessions have also seen liquidity briefly evaporate in the US bond market, which traders attributed to a gateway failure at the CME. There was no notable impact on price action, although the sudden bouts of thin liquidity left traders scratching their heads.
SUPPLY
Notes/Bonds
Bills
- US sold 4-wk bills at high-rate 3.650%, B/X 2.73x; sold 8-wk bills at high-rate 3.670%, B/C 2.77x
- US to sell USD 100bln of 4-wk bills and USD 90bln of 8-wk bills on Aug. 27th; all to settle on Sept. 1st
STIRS / OPERATIONS
- Fed Hike Pricing via CME FedWatch: Sept 8.5bps (prev. 10.0bps), Dec 27bps (prev. 26.1bps).
- EFFR at 3.63% (prev. 3.63%), volumes at USD 112bln (prev. USD 109bln) on August 26th
- SOFR at 3.64% (prev. 3.66%), volumes at USD 2.859tln (prev. USD 2.916tln) on August 26th
- NY Fed RRP op demand at 0.46bln (prev. 0.70bln) across 8 counterparties (prev. 4) on August 27th
A session of this kind, a 1 to 3bp cheapening across the curve with a steeper belly-led profile, reads as position-squaring ahead of a known event risk rather than a repricing of the path, and the drift lower in hike pricing alongside slightly higher yields is consistent with that: the front end was bid even as cash yields edged up. The day's inputs were second tier. A wider goods trade deficit driven by capital goods imports tied to AI demand has tended to be treated as a growth-positive import story rather than a softening one, and low claims continued to describe a low-hire, low-fire labour market that has not, on past form, shifted the policy debate on its own. The 7-year stopping on the screws after a strong 2- and 5-year earlier in the week fits the established pattern that auctions clear when outright yields are attractive; the composition shift, direct bidders up, indirects down, dealers near average, is the sort of detail that matters only if it repeats. The repeated bouts of thin liquidity attributed to a CME gateway failure echo prior technical episodes that left no lasting mark on price but raised the cost of hedging at the margin. The follow-on is the Friday remarks from the Fed Chair, with the run of hawkish-leaning commentary from regional presidents, talk of hikes rather than cuts, setting up an asymmetric reaction if the Chair validates or pushes back against that wing.