Invesco Global Liquidity Monthly

The US Treasury yield curve bull steepened in August led by the 2-year Treasury note yield which was lower by 34 bps as the 30-year Treasury bond yield was 3bps higher.¹ However, most of the decline in the 2-year occurred on August 1 following the surprisingly weak July employment report and sizable prior revisions. Recall President Trump subsequently fired the head of the Bureau of Labor Statistics. Since then, initial jobless claims have remained relatively low although continuing claims are elevated at the highest level in over three years as it is taking longer for workers who lose their jobs to find new ones.

Treasury bill yields were also lower with an added kick following Jerome Powell’s Jackson Hole speech which opened the door to a September 17 FOMC rate cut of 25 bps. We expect T-bill supply to continue to increase as the Treasury is not finished replenishing the Treasury General Account.

In a recent speech titled “Let’s Get On with It”, newly outspoken Fed dissenter and potential Fed chair candidate, Governor Christopher Waller, reiterated his stance for a rate cut in September to not “risk falling behind the curve in setting appropriate monetary policy.”² As of the end of August, the market was pricing an 88% probability of a 25bps rate cut at the September 17 FOMC meeting.³

Markets are pricing 125 bps to 150 bps in cuts through the end of 2026 (including a potential September cut).³ The yield difference between the 1-month US T-bill and 2-year US T-note was -70bps at month-end reflecting this dynamic.3 Could the US Treasury yield curve return to a normal slope in 2026?

Short-term credit spreads remained low with 1-3 year US corporate spreads ending the month at 51 bps after reaching a multi-year low in mid-August of 47bps.⁴

Usage of the Fed’s overnight reverse repurchase agreement program (ON RRP) declined to the lowest level in more than four years. The Fed’s ON RRP has declined as money market managers seem to be extending out the curve.

We continued to extend the weighted average maturity (WAMs) of our money market strategies in August. This initiative started in late July to better position for potential rate cuts.

We saw pockets of value in term repurchase agreements versus T-bills and Treasury coupon issues from 9- to 12-months in August. Agency discount notes continued to trade tight versus comparable T-bills.