TREASURY WRAP: T-NOTE FUTURES (U6) SETTLES 7 TICKS HIGHER 108-25

Yield curve flattens after Treasury boosts long-end buybacks. At settlement, 2-year+0.2bps at 4.179%, 3-year +0.2bps at 4.253%, 5-year -1.4bps at 4.353%, 7-year -3.6bps at 4.487%, 10-year -5.7bps at 4.651%, 20-year -9.3bps at 5.184%, 30-year -9.1bps at 5.195%.

THE DAY: The Treasury curve flattened on Wednesday, with the primary driver of price action a surprise announcement from the US Treasury that it will increase the maximum size of its long-end liquidity-support buyback operations. The Treasury said it will increase the maximum purchase amount per operation to "at least" USD 4bln from USD 2bln, following strong offers at recent long-end operations. The announcement supported the long end and reversed some of the pronounced steepening seen in recent sessions.

Desks have questioned the timing of the announcement, given the Quarterly Refunding Announcement was released only two weeks ago, when the Treasury laid out its quarterly buyback schedule. Since then, long-end yields have risen to levels not seen since before the Global Financial Crisis.

ING notes that while the Treasury says the change is purely intended as a liquidity enhancement, the timing raises the possibility that it is responding to the seemingly relentless rise in long-dated yields. The desk suggests the move could signal that the Treasury is monitoring developments and is prepared to act, although it stresses that buybacks are ultimately a zero-sum operation and are therefore unlikely to materially alter the natural trajectory of long-end yields. ING instead expects the measure to provide some dampening effect on the recent rise.

Aside from that, the FOMC Minutes confirmed signals sent from Fed members in recent weeks; Several favoured a rate increase at the July meeting while most participants assessed higher rates would likely be necessary if inflation did not fall. Meanwhile, Chair Warsh argued for six scheduled meetings per year, down from eight, albeit no final decision was made.

Meanwhile, the 20-year bond auction was soft, tailing by 0.5bps with a below-average bid-to-cover ratio and above-average dealer allocation. Direct demand improved notably, but indirect participation fell below both the prior auction and recent average. The auction followed the sizeable richening in the long end after the Treasury's buyback announcement, which reduced the yield concession available to investors heading into the offering and may have contributed to the softer result.

• US sold USD 16bln of 20-year bonds; tail 0.5bps.

• US sold 17-week bills at a high rate of 3.750%, B/C 3.35x.

• Fed Hike Pricing via CME FedWatch: Sept 8.7bps (prev. 9.2bps), Dec 23bps (prev. 24.0bps).
• EFFR at 3.63% (prev. 3.63%), volumes at USD 89bln (prev. USD 93bln) on August 18th.
• SOFR at 3.65% (prev. 3.66%), volumes at USD 3.01tln (prev. USD 3.068tln) on August 18th.
• NY Fed RRP op demand at USD 0.32bln (prev. USD 0.15bln) across 18 counterparties (prev. 6) on August 19th.