TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 9 TICKS LOWER AT 108-16
Treasury yields rise as long end briefly pares post-buyback rally. At settlement, 2-year +2.1bps at 4.183%, 3-year +2.8bps at 4.264%, 5-year +4.3bps at 4.382%, 7-year +4.9bps at 4.524%, 10-year +5.1bps at 4.692%, 20-year +4.2bps at 5.218%, 30-year +4.0bps at 5.229%.
THE DAY: Treasury yields rose across the curve on Thursday, with the 30-year briefly returning to levels seen before Wednesday's Treasury buyback announcement. The belly and long end led the move higher, resulting in a steeper curve and reversing some of the flattening seen following the Treasury's decision to increase long-end liquidity-support buybacks.
Treasury futures briefly took another leg higher after US Treasury Secretary Bessent told CNBC that the upsized long-end buybacks could exceed USD 4bln per operation, consistent with the "at least" USD 4bln language announced on Wednesday. Bessent reiterated that the programme is intended to enhance liquidity in thinner areas of the curve, although he acknowledged that part of the move is about signalling. When asked what the Treasury could do if long-end yields continued to rise, Bessent said it has a large toolkit but provided little additional detail. Despite the initial move higher in futures during his remarks, the move subsequently reversed, with Treasuries settling lower across the curve. The reversal suggests the buyback announcement may help dampen pressure at the long end but, at least so far, has not fundamentally altered the underlying direction of yields - in fitting with remarks from ING on Wednesday.
Elsewhere, Fed's Musalem reiterated that he favoured raising rates in July, arguing that hiking now could avoid the need for larger moves further down the line. Meanwhile, Fed's Daly reiterated that she favoured holding rates and believes policy is currently in a good place. Economic data were mixed, with Initial Jobless Claims remaining low, while Continuing Claims for the preceding week rose.
The 30-year TIPS auction was strong again. The 1.8bp stop-through, above-average bid-to-cover, exceptionally strong indirect participation and very low dealer allocation pointed to very strong demand, with the substantially higher real yield on offer likely helping attract investors to long-end inflation-protected duration.
Crude prices were also firmer amid reports that the Houthis are preparing to enter a new phase of escalation against Saudi Arabia. Meanwhile, Iranian Supreme Leader adviser Rezaei said the best response to Trump's escalation of economic warfare would be to withdraw from the Nuclear Non-Proliferation Treaty, which legally commits Iran to maintaining a peaceful nuclear programme. US President Trump also reportedly told his team that the chances of reaching a deal with Iran are slim and ordered a freeze on talks for several weeks.
SUPPLY
Notes/Bonds
- US to sell USD 69bln of 2-year notes on August 25th, USD 70bln of 5-yr notes on Aug. 26th, and USD 44bln of 7-yr notes on Aug. 27th; all to settle on Aug. 31st
- US sold USD 8bln of 30-year TIPS; stop-through 1.8bps
Bills
- US sold 4-week bills at a high rate of 3.640%, B/C 2.84x; sold 8-week bills at a high rate of 3.655%, B/C 3.06x
- US to sell USD 92bln of 13-wk bills and USD 79bln of 26-wk bills on August 24th, USD 95bln of -wk bills on Aug. 25th and USD USD 28bln of reopened 2yr FRN on Aug. 26th; all to settle on Aug. 27th.
STIRS / OPERATIONS
- Fed Hike Pricing via CME FedWatch: Sept 8.7bps (prev. 8.3bps), Dec 22.6bps (prev. 23.2bps)
- EFFR at 3.63% (prev. 3.63%), volumes at USD 95bln (prev. USD 89bln) on August 19th
- SOFR at 3.62% (prev. 3.65%), volumes at USD 2.923tln (prev. USD 3.01tln) on August 19th
- NY Fed RRP op demand at 0.23bln (prev. 0.32bln) across 1 counterparties (prev. 18) on August 20th
- NY Fed T-Bill Purchases (1-4 month): Accepts USD 4.24bln of USD 28.33bln offered; Offer-to-cover 6.68x
- Treasury Buyback [Liquidity support, 3-5yr nominal coupons, max USD 4bln]: Accepts USD 1.86bln of 10.159bln offers; Accepts 3/48 eligible issues. O/C 5.46x.
The defining feature here is the failure of a policy intervention to hold its initial bid. Buyback announcements of this kind have historically produced an immediate rally in the targeted sectors followed by partial retracement, since liquidity-support operations change the cost of holding positions in thinner issues without altering the underlying fiscal and inflation drivers of the curve; the pattern to note is that the long end briefly round-tripped the entire post-announcement move within a session. The twist steepening, belly and long end leading, is the standard signature when duration supply concerns reassert against a front end pinned by policy expectations, and it matches how comparable episodes of heavy coupon supply have traded. The distinction worth drawing is between signalling effect and flow effect: official commentary acknowledging a signalling component has tended to shorten the half-life of the rally, while actual operation sizes and acceptance ratios become the durable tell, making each subsequent buyback result a data point on Treasury's appetite. Strong real-yield auction demand alongside weaker nominal appetite is a recurring configuration when term premium is doing the work, since inflation-linked duration clears at levels investors find adequate while nominal paper requires concession. Follow-ons are the pace and sizing of future buyback operations, any elaboration of the toolkit remark, and whether coupon auctions continue to require concession against this supply calendar.