〔Overnight Brief〕Fed Pauses Reserve Management Purchases; 30-Year Auction Yield Hits 2001 High

Fed Pauses Reserve Management Purchases

The Federal Reserve announced it will not conduct reserve management purchases (RMP) of Treasury bills in the monthly operation period ending September 14, indicating that bank reserves are at a desirable level ^[1][2]. The New York Fed's trading desk still plans about $17 billion in reinvestment purchases during this period ^[3][4][5]. This pause shows confidence in funding markets despite potential liquidity drains from rising government cash balances ^[1][2]. Notably, the secured overnight financing rate (SOFR) has been below the interest on reserve balances (IORB) for most of July, with SOFR at 3.62% as of August 12, 3 basis points below IORB ^[2]. The Fed emphasized this does not represent a change in monetary policy or balance sheet strategy ^[1][2].

Rate Path and Market Probabilities

According to CME FedWatch, the probability of the Fed holding rates unchanged at the September meeting is 65.2%, while a 25-basis-point hike has a 34.8% probability ^[6]. For October, the probabilities are 50.1% for no change, 41.8% for a 25-basis-point hike, and 8.1% for a 50-basis-point hike ^[6]. The market's pricing reflects reduced expectations after benign US inflation data, with traders cutting bets on a September hike ^[7]. Goldman's Kaplan said the Fed's rate pause was the right call ^[8].

Treasury Auctions and Yield Dynamics

The US Treasury's $25 billion 30-year bond auction on August 13 saw a high yield of 5.216%, the highest since 2001 ^[9][10][11]. The auction had a "tail"—the high yield was above the pre-auction yield—indicating slightly weaker demand ^[9]. The bid-to-cover ratio was 12.10%, up from a prior 7.13% ^[12]. This was the second consecutive long-term auction with multi-year high yields; the 10-year auction earlier in the week saw its highest since 2007 ^[9]. The 30-year yield rose slightly after the auction, last at 5.217% ^[13]. These high yields reflect not only Fed policy expectations but also fiscal supply, inflation risk, and term premium ^[9].

Economic Data and Market Reaction

US July PPI showed cooling inflation, which, along with lower oil prices, boosted risk appetite ^[14]. The S&P 500 rose 0.65% to a record close, and the Nasdaq gained 0.81% ^[14]. The 2-year Treasury yield fell 4.82 basis points, and the 10-year yield fell 4.57 basis points ^[14]. Initial jobless claims rose by 9,000 to 209,000 for the week ending August 8, above the forecast of 202,000, but the 4-week moving average held at 199,000, indicating labor market resilience ^[15]. Money market fund assets increased to $7.93 trillion ^[16]. Additionally, Fitch affirmed the US sovereign rating at AA+, projecting a debt ceiling hit by mid-2027 and government debt/GDP at 123% by 2028 ^[17].