AFS Markets Blog: Morning 20/08/2026

• Meanwhile in markets, long bonds are finally catching a bid thanks to US Treasury Secretary Bessent’s intervention to arrest the relentless rise in long end yields;

• Recall yesterday’s surprise announcement that the Treasury would at least double buybacks of 30y bonds. The 30y is still about 10bps lower at 5.19 on the news. That represents a more substantial 24bps decline from Tuesday’s high, which in turn was the highest level in decades;

• I will be paying special attention to the funding part of the buybacks. In particular, will the Treasury ramp up bill issuance? If that’s the case, we could have a textbook case of QE through the backdoor. Note that the Fed is buying bills to keep bank reserves at a relatively ample level. Relatively larger bill issuance will put upward pressure on money market rates. And repo rates in particular – for money market types repo is an alternative for bills. If that forces the Fed to ramp up bill purchases, then the end result is that the deficit is financed with reserves (a perpetual liability of the Fed that is remunerated at the overnight rate). Which, given the US fiscal situation, will put more pressure on the Fed to keep rates low – inflation be damned;

• And speaking of the Fed, yesterday’s release of the FOMC minutes of the July meeting showed that there was broader support for rate hikes beyond the three dissenters. According to the minutes "many” officials believed that tightening would be necessary if inflation won’t come down. I think that goes without saying. Regardless, after the July FOMC meeting we learned that two non-voting regional Fed Presidents would have dissented in favor of a hike if they had a vote;

• Fed rates pricing hasn’t changed much overnight, with punters still leaning towards a December hike with 22bps of hikes priced in. 2y and 10y Treasury yields are flattish in the Asian session, with both tenors now back to where they were before the Treasury announcement. Asian equities are up with moderate gains except for the Korean Kopsi, which is almost six percent in the green. In the greater scheme of things, in the past five days we’ve seen some profit taking on the recent rebound in AI stocks. On our highly representative AI market screener, fifteen out of twenty stocks are down on a five-day basis, with losses averaging five percent. Which, by the way, doesn’t make a dent in the average YTD gain of more than 110 percent;

• Brent crude oil futures at $91.9 a barrel are a smidgen below yesterday’s high. The Axios story that the US military is once again covertly guiding ships through the Strait of Hormuz along the Omani coast apparently hasn’t dented crude futures prices. According to Axios in the past several weeks, 15 to 20 tankers have entered and exited the Strait. Which, by the way, is still a fraction of the pre-war transits. In any case, perhaps President Trump’s threats of economic D-Day against Iran are keeping oil prices up as Tehran is covertly and not so exporting crude;

• Dutch natural gas futures remain close to their highest level since the spring, with prices at 64 euros per MWh or thereabout. We’ve seen almost daily stories of European gas storage running dangerously low for the upcoming winter. That hasn’t woken up our eurocrat overlords. But believe me they will – when it’s too late;

• Long end Japanese government bonds are benefitting from the US Treasury buyback ops announcement. I clock the 30y down no less than 13bps on the day. The yen has been able to hold on to most of yesterday’s gains, with the all important USDJPY cross trading in the mid 158s after touching a low of 158.03 earlier in the session;

• Looking ahead, today’s calendar is uneventful with the Riksbank interest rate decision and US jobless claims being the main events. Focus will turn to late next week, when the Fed’s annual Jackson Hole conference kicks off.

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