TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 1 TICK HIGHER AT 107-13

Yield curve marginally steepens as eyes turn to ISM Services and Waller on Thursday before NFP on Friday. At settlement, 2-year -1.2bps at 4.388%, 3-year -0.8bps at 4.455%, 5-year -0.6bps at 4.553%, 7-year unchanged at 4.669%, 10-year unchanged at 4.796%, 20-year +0.6bps at 5.277%, 30-year +0.3bps at 5.270%.

THE DAY: The Treasury curve marginally steepened on Wednesday, with front-end yields edging lower while the belly and long end were little changed. Price action was relatively subdued despite a decent amount of newsflow, although the elevated yield environment continued to attract attention from administration officials, with both Lutnick and Bessent commenting on recent moves in the Treasury market.

Lutnick was asked about higher global bond yields and potential Treasury intervention, saying he believes the market will stabilise in a more significant way than people expect. He said he is optimistic the bond market will "treat us well", although it may take a couple of months for rates to stabilise, adding that he remains comfortable with current levels. Bessent meanwhile discussed the Treasury's buyback operations, saying the aim is to avoid bad market outcomes and help prices return towards equilibrium. He added that buybacks free up dealer balance sheets and create additional capacity for banks to participate at Treasury auctions.

The data highlight was the August ADP Employment report ahead of Friday's NFP. Private payrolls rose by 38k, below the 47k forecast and slowing from the prior 44k, although the report provides an imperfect read-across to the official payrolls data. The median annual pay increase for job stayers accelerated to 4.4%, while pay growth for job changers eased to 7.3% from 7.5%. Elsewhere, Factory Orders rose 0.9%, above the 0.6% forecast and rebounding from the prior 0.2% decline.

Fed speak saw Williams argue that recent bond market moves have been driven primarily by the strength of the US economy and significant AI-related investment rather than the inflation outlook or financial conditions. He also said Treasury buybacks do not complicate monetary policy. On the neutral rate, Williams noted that the current real interest rate is around 1% and that an environment of stronger investment and productivity could imply a higher real neutral rate, although he stressed that the data are not yet clearly signalling that neutral has risen.

Elsewhere, oil prices edged higher as recent geopolitical escalation continued to provide support, although Trump suggested the renewed campaign would not last much longer. Meanwhile, agreements were announced between the US and Venezuela, including with Chevron (CVX), giving the US significant influence over Venezuelan oil reserves.

Looking ahead, Thursday sees remarks from Fed Governor Waller, Hammack and Goolsbee ahead of the FOMC blackout period beginning Saturday. Data highlights include ISM Services, weekly Initial Jobless Claims and final Q2 Productivity and Unit Labour Costs, before attention turns firmly to Friday's US NFP report.

THE DAY: 

SUPPLY

• US sold 17-week bills at a high rate of 3.855%, B/C 2.78x
• US to sell USD 85bln of 8-wk bills and USD 90bln of 4-wk bills on September 3rd; all to settle Sept. 8th

STIRS / OPERATIONS

• Fed Hike Pricing via CME FedWatch: Sept 16.1bps (prev. 16.8bps), Dec 38.4bps (prev. 39.7bps). 
• EFFR at 3.63% (prev. 3.63%), volumes at USD 114bln (prev. USD 105bln) on September 1st
• SOFR at 3.66% (prev. 3.68%), volumes at USD 2.912tln (prev. USD 3.056tln) on September 1st
• NY Fed RRP op demand at 0.53bln (prev. 0.72bln) across 1 counterparties (prev. 2) on September 2nd