Steeper by the Dozen: US Rates Strategy | North America

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Idea

August 14, 2026 11:47 PM GMT

US Rates Strategy | North America

Morgan Stanley & Co. LLC

Martin W Tobias, CFA

Strategist

Steeper by the Dozen

Matthew Hornbach

Strategist

Recent data reinforce a lower Fed terminal rate path, leaving

room for further M7 outperformance vs. M8, as hike risk

premium dissipates. We expect Fed RMPs now pause around

quarterly tax dates, but resume thereafter as structural currency

growth anchors an underlying need for reserve maintenance.

Shaun Zhou

Strategist

Aryaman Singh

Strategist

Eli P Carter

Strategist

Key Takeaways

Recent labor, consumption, and inflation data all pointing to an economy not

overheating has led market participants to reprice the Fed’s terminal rate lower.

We think weak labor demand, softer spending, and benign inflation mean less

hike risk premia, which bodes for more steepening in the SFRM7M8 futures

curve.

The Fed will not conduct reserve management purchases (RMPs) this month

after purchasing a total of $215bn in bills via RMPs since mid-December 2025.

We expect RMPs will resume in mid-September since growth in currency in

circulation anchors an underlying, structural annual reserve need (~$80bn).

Fewer RMPs are a marginal headwind to our 2-year UST swap spread long

recommendation, but MMF portfolio bias to repo should keep funding orderly.

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