TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 6 TICKS LOWER AT 107-15

Short-end yields rally as hot NFP lifts Fed hike bets in September. At settlement, 2-year +4.1bps at 4.381%, 3-year +3.8bps at 4.453%, 7-year +2.2bps at 4.659%, 10-year +1.2bps at 4.784%, 20-year -0.2bps at 5.250%, 30-year -0.6bps at 5.246%.

THE DAY: Treasuries flattened as a better-than-expected NFP report sparked hawkish repricing of FOMC expectations in September. Employment grew 162k, beating the expected 55k, accompanied by +55k revisions over the last two months. As such, the unemployment rate stood firm at 4.1% as expected despite an uptick in the participation rate to 61.6% from 61.4%. Subsequently, US 2yr yields hit a new YTD high, albeit, the extent of the move was short-lived with yields on the long end little changed from pre release (2- & 3yr yields held onto ~half of the gains). 

Whilst the report raises the likelihood of a hike in Sept/2026, the focus was and still remains on the inflation mandate. Thus, today's NFP report confirms to the Fed the labour market landscape is still stable, but as Governor Waller pointed towards in this speech the week, the bar could still possibly be high for a hot CPI/PPI report next week to convince some members to shift towards tightening. Now, money markets are pricing in about 58% chance of a 25bps hike at the September meeting vs 50% beforehand. Attention now turns to US CPI and PPI next week.

STIRS / OPERATIONS

• Fed Hike Pricing via CME FedWatch: Sept 14.6bps (prev. 12.6bps), Dec 34.5bps (prev. 32.5bps).
• EFFR at 3.63% (prev. 3.63%), volumes at USD 109bln (prev. USD 114bln) on September 3rd
• SOFR at 3.66% (prev. 3.65%), volumes at USD 2.949tln (prev. USD 2.882tln) on September 3rd
• NY Fed RRP op demand at 0.675bln (prev. 0.702bln) across 2 counterparties (prev. 4) on September 4th