TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 1+ TICKS HIGHER AT 108-28+

Treasuries continued to track swings in oil prices as economic data had little lasting impact. At settlement, 2-year -1.5bps at 4.179%, 3-year -0.7bps at 4.234%, 5-year -0.2bps at 4.324%, 7-year -0.1bps at 4.463%, 10-year +0.2bps at 4.617%, 20-year +0.7bps at 5.174%, 30-year +0.1bps at 5.173%.

THE DAY: Treasury yields were little changed by settlement after a session largely driven by swings in crude prices. Yields began the day with a firmer bias, tracking oil higher. However, as crude prices pared their gains on hopes of progress towards reopening the Strait of Hormuz—with reports suggesting Iran and Oman are close to an agreement—Treasuries recovered, leaving yields little changed across most of the curve by the close.

There was little reaction to the Quarterly Refunding Announcement, which contained few surprises. The Treasury maintained coupon auction sizes and left its forward guidance unchanged, while the TBAC minutes showed dealers now generally expect coupon auction sizes to increase 'sometime' in 2027, compared with 'early' 2027 previously.

Economic data had little lasting impact. ADP Employment Change disappointed ahead of Friday's nonfarm payrolls report, with analysts suggesting it adds downside risk to the private payroll component. Meanwhile, the ISM Services PMI was little changed in July but came in below expectations despite improvements in business activity and new orders. The employment component slipped back into contractionary territory, while the prices paid index accelerated, leaving the report mixed overall.

Fed speak saw further hawkish commentary. Schmid (2028 voter) said restrictive policy is still needed to return inflation to the 2% target, stressing that inflation remains too high and is still concerning. He suggested current policy is not particularly restrictive, warned that the recent relief in energy prices may prove temporary, and said the labour market appears broadly in balance. Schmid also argued that AI-related investment is adding to inflationary pressures, which the Fed should not ignore. Meanwhile, Kashkari (2026 voter, hawkish dissenter) reiterated that now is the time to begin gradually raising rates, stressing he is not calling for aggressive tightening but would rather start with small increases than wait until larger moves become necessary.

Overall, economic data has taken a back seat this week, with swings in oil prices continuing to dictate Treasury price action. However, Friday's nonfarm payrolls report will provide the next major test for the rates market. A weaker-than-expected report could see yields extend their recent decline, while a stronger print may reinforce hawkish Fed expectations and push yields higher, particularly at the front end of the curve.

• Quarterly Refunding: Treasury maintains coupon and FRN guidance.

• US sold 17-week bills at a high rate of 3.785%, B/C 3.19x
• US to sell USD 110bln of 4-week bills and USD 100bln of 8-week bills on August 6th; to settle August 11th

• Fed Pricing via CME Fed Watch: Sept 13.7bps (prev. 14.2bps), Dec 31.0bps (prev 32bps)
• EFFR at 3.63% (prev. 3.63%), volumes at USD 117bln (prev. USD 111bln) on August 4th
• SOFR at 3.66% (prev. 3.65%), volumes at USD 3.036tln (prev. USD 3.055tln) on August 4th
• NY Fed RRP op demand at 1.65bln (prev. 2.25bln) across 2 counterparties (prev. 3) on August 5th