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TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 8 TICKS HIGHER AT 107-21

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TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 8 TICKS HIGHER AT 107-21

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T-notes rally across the curve after Waller keeps September hold in play. At settlement, 2-year -3.7bps at 4.334%, 3-year -3.1bps at 4.405%, 5-year -2.5bps at 4.511%, 7-year -2.4bps at 4.627%, 10-year -1.6bps at 4.764%, 20-year -2.0bps at 5.244%, 30-year -1.6bps at 5.244%.

THE DAY: The Treasury curve bull steepened on Thursday, predominantly in response to a dovish set of remarks from Fed Governor Waller.

Governor Waller said he would support holding the policy rate steady at the September FOMC if the August inflation data, due next week, shows continued progress. In the Q&A, he added that the Fed can afford to wait one meeting to give disinflation a chance. The remarks saw money markets move back towards a 50/50 split between a September hike and hold, unwinding some of the hawkish repricing seen after Chair Warsh last week, when he said the Fed has more work to do unless officials are confident underlying inflation is moving towards the 2% goal. Markets had priced a near-70% probability of a September hike earlier this week following Warsh's remarks and the latest US-Iran escalation. Although Waller's comments were dovish, his view remains heavily dependent on next week's inflation data; he warned that a hot print could warrant a rate hike, but said he is optimistic on inflation and is seeing signs of disinflation.

Elsewhere, oil prices extended recent gains, perhaps limiting some of the rally in Treasuries, amid reports that the Houthis had launched a large-scale offensive on multiple fronts along the western coast, according to Sky, citing sources. Meanwhile, Oman reportedly rejected Iran's request to jointly charge service fees on commercial ships passing through the Strait of Hormuz, following threats from US President Trump.

Away from Waller, US data saw the ISM Services PMI beat expectations, although the prices component accelerated while employment was little changed. Jobless claims remained low, while Challenger layoffs accelerated and the US trade deficit widened, albeit by slightly less than expected.

Attention now turns to Friday's Nonfarm Payrolls report for further direction on September Fed expectations, before the focus shifts to US CPI and PPI next week.

SUPPLY

Notes

  • US to sell USD 58bln of 3-year notes on September 8th, USD 39bln of 10-year notes on September 9th and USD 22bln of 30-year bonds on September 10th; all to settle September 15th

Bills

  • US sold 4-week bills at a high rate of 3.700%, B/C 297x; sold 8-week bills at a high rate of 3.750%, B/C 3.02x
  • US to sell USD 75bln of 6-week bills, USD 92bln of 13-week bills, USD 79bln of 26-week bills, on September 8th; all to settle Sept 10th.

STIRS / OPERATIONS

  • Fed Hike Pricing via CME FedWatch: Sept 12.6bps (prev. 16.1bps), Dec 32.5bps (prev. 38.4bps).
  • EFFR at 3.63% (prev. 3.63%), volumes at USD 114bln (prev. USD 114bln) on September 2nd
  • SOFR at 3.65% (prev. 3.66%), volumes at USD 2.882tln (prev. USD 2.912tln) on September 2nd
  • NY Fed RRP op demand at 0.70bln (prev. 0.53bln) across 4 counterparties (prev. 1) on September 3rd
  • Treasury Buyback [Cash management, 1mth to 2yr, max USD 12.5bln]: Accepts USD 12.5bln of 28.272bln offers; Accepts 24/45 eligible issues
Context

Sessions driven by a single Fed official walking back a colleague's hawkish signal are a familiar pattern in live hiking cycles, and the shape of the move here is the textbook one: a bull steepening led by the front end, with the 2-year outperforming the long bond, because it is the timing of the next meeting that is being repriced rather than the terminal rate. The tell in this tape is the money market swing back toward an even split on September after a near-majority had been priced for a hike, a reversal consistent with how pricing has behaved in past episodes where committee members have publicly disagreed on the near-term path, since the market averages the wings until the data adjudicates. The conditionality is the substantive point: the hold is explicitly framed as dependent on the incoming inflation print, which concentrates the repricing risk into the CPI release and raises the sensitivity of the front end to it, the usual sequence when officials tie themselves to a specific data point. The oil bid and Gulf shipping headlines are acting as the counterweight at the long end, a recurring constraint on duration rallies when supply-side inflation risk is in play, and the prices-paid component in the services survey points the same way. The follow-ons are payrolls, then CPI and PPI, with the upcoming 3-, 10- and 30-year supply testing demand into a data-heavy window; whether other Fed speakers echo the patient framing or side with the more work to do line will indicate which wing of the committee the September decision tracks.

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