US Rates Weekly 20260807

Key arguments

• Treasury kept coupon auction sizes steady and maintains 'several quarter' commitment; weekly bill issuance expected steady through mid-September; net bill supply up $250bn in Q4 with lower year-end cash target of $850bn.
• Expanding TRACE reporting could improve liquidity but bills are less sensitive due to fungibility and deep secondary market; off-the-runs and TIPs more reliant on dealer intermediation, making increased reporting potentially harmful.
• Uncertainty around new Fed chair Warsh's reaction function keeps implied vol rich to realized and term premium near upper range; credible communication framework could compress vol and bring back long-term buyers.
• A mechanical auction strategy (sell half Friday, buy full at auction, sell remaining Monday) worked 58% of time in 10y (avg +2.6bp) and 67% in 30y (avg +1.7bp) over last 12 months.
• Forecast July CPI at 0.1% m/m headline (3.5% y/y) and 0.18% m/m core (2.6% y/y); retail sales +0.1% m/m headline and ex autos; core CPI expected to trend lower over remainder of year.

Corresponding source evidence

1. The Treasury kept coupon auction sizes steady and maintained its “several quarter” commitment. We expect weekly bill issuance to hold steady through mid-September. · through mid-September
2. It may be easier to report more aggregate and detailed transaction-level data for bills given their deeper secondary market liquidity and less reliance on dealer intermediation. · not specified
3. Until Warsh gives the market a reaction function and a sense for what data he is watching, implied vol is likely to stay rich to realized. This may keep long-end buyers sidelined. · until Warsh provides guidance