SOFR OPTIONS: Large Multi-Leg (Mostly) Put Structure Sale

We've published our preview of the August Treasury Refunding - Download Full Report Here

August Refunding Preview: Guidance In Focus Again As Upsizing Draws Nearer

• Treasury’s August Refunding round begins Monday Aug 3 (3pm ET) with the Treasury’s update on financing requirements for the current (Jul-Sep) and next (Oct-Dec) quarters. As usual, more attention will be on the full Refunding announcement on Wednesday (8:30am ET), in which any adjustments to the policy statement’s guidance on future auction size increases will be the most closely-watched aspect. As time passes there are increasing chances of a change here, with consensus being for an upsizing in coupon auction amounts at some point in the next year.
• Guidance: For now, Treasury will continue to lean on bill issuance instead of coupon upsizing, and will only be encouraged to avoid shifting the burden onto longer-maturity issuance especially given the recent rise in long-end yields. Though eventually the widening financing gap will require coupon upsizing, and our base case remains that will come in May 2027. In turn this may necessitate some softening in the guidance now. Last time, in May’s refunding, we incorrectly anticipated that the guidance would be tweaked by removing the words “at least” from "Treasury anticipates maintaining nominal coupon and FRN auction sizes for at least the next several quarters", which would keep open the possibility of increases next year (“next several quarters”); that outcome seems more likely this time.
• Financing/Borrowing Expectations: Monday’s financing requirements release is likely to see a slight increase to May’s estimates of both financing needs and borrowing for the Jul-Sep quarter, with the following quarter set to see a slight sequential decline.
• Buyback Announcement: It’s most likely Treasury will again announce quarterly buybacks including $38B for liquidity support and $25B for cash management again.
• Other topics to watch: Treasury asked primary dealers about changing the structure of 7Y auctions which could move to a schedule that includes new quarterly issuance with reopenings. Additionally there could be follow-up on a proposal to allow Treasury to invest excess cash from the TGA into the repo market, in part to reduce reserve and therefore repo market volatility.
• Upcoming Supply: August’s auctions begin with the anticipated refunding: Aug 11 with $58B in 3Y Note, Aug 12 with $42B in 10Y Note, and Aug 13 with $25B in 30Y Bond.
• Monthly Auction Review: July’s coupon auctions were mixed, with no clear underperforming segment of the curve, and no aggressively strong or weak individual auctions. The 2-, 3-, 10- and 30-year lines saw modest trade throughs, while the 5-, 7- and 20-year lines tailed. 

From the NYTimes: "Warsh is considering reducing the number of regularly scheduled meetings at which the Federal Reserve sets interest rates, a potentially seismic move that would mark the most significant change in how the central bank operates in years. The Federal Reserve’s 12-person policy committee meets eight times a year and votes on whether to lift, lower or hold borrowing costs. Mr. Warsh raised the idea of changing the frequency of those meetings at the Fed’s gathering this week, according to four people with knowledge of the discussion who were not authorized the speak publicly. Mr. Warsh, who was presiding over his second meeting as chairman, left the impression that a revised schedule could be decided on before the next meeting in mid-September, even if the changes would not be carried out until later."

Also next week:

• July’s ISM surveys are expected to reflect improvement in manufacturing and services activity alongside softer – though still elevated - price pressures. The ISM Manufacturing PMI (Monday) is seen rising to 54.0 by the median analyst in the Bloomberg survey, a touch higher than the 53.3 prior in part reflecting better New Orders (57.0 after 56.0). That seems to accord with regional Fed manufacturing surveys which had the highest average ISM PMI equivalent in 51 months, including the 2nd-highest New Orders in the last 55 months in July, with Employment relatively steady in the month at around the strongest levels since 2022. Additionally, the Chicago Business Barometer, produced with MNI, edged up 0.9 points to 57.6 in July, driven by stronger New Orders albeit offset by weaker Supplier Deliveries, Order Backlogs, Employment and Production. The Services PMI (Wednesday) is expected to show an uptick in the headline PMI to 54.4 from 54.0 prior; regional Fed non-manufacturing reports for July posted some of the strongest activity readings in the last 5 years.
• Consensus expects a moderation in the Prices Paid gauge, with Manufacturing down to 70.0 from 73.0 prior and Services to 65.0 from 67.7. That disinflationary impulse looks somewhat ambitious given the rebound in energy prices in July after re-escalation in the Middle East, but may reflect some moderation on that front in the regional Fed surveys (which were largely taken in the early part of the month).
• Treasury’s August Refunding round begins Monday Aug 3 (3pm ET) with the Treasury’s update on financing requirements for the current (Jul-Sep) and next (Oct-Dec) quarters. As usual, more attention will be on the full Refunding announcement on Wednesday (8:30am ET), in which any adjustments to the policy statement’s guidance on future auction size increases will be the most closely-watched aspect. Coupon sizes have held steady for 9 consecutive refundings, and no analysts that we are aware of expect any changes to nominal auction sizes for the upcoming quarter. However a couple of analysts think it’s finally time for guidance to be meaningfully changed to open the door to bigger Treasury sales next year. As time passes there are increasing chances of a change here, with consensus being for an upsizing in coupon auction amounts at some point in 2027 (the median analyst eyes May 2027 which is also the MNI Markets Team’s base case).