In fact, nothing highly unusual was found in the QRA. The coupon increases, which had drawn everyone's attention, naturally did not take place, and as expected, the phrasing in the guidance was changed from "for at least the next several quarters" to "for the next several quarters." In other words, the phrase "at least" was removed, which was anticipated this time around. Two additional phrases were added:"As part of that process, Treasury will engage with a variety of market participants to better understand evolving Treasury supply and demand dynamics," and "In considering any changes, Treasury will be guided by the objective of financing the government at the lowest cost over time." What particularly catches the eye is "variety of market participants." Looking back, this expression was previously used during the TIPS increase in November 2020 and the coupon cuts in November 2021. Considering that it was used in 2021 when the 7Y and 20Y were reduced relatively more heavily, we can see that the phrase "variety of market participants" actually hints at decisions regarding distribution across issuance tenors and shifts in that distribution. The market was already somewhat aware of these changes in tenor distribution. Aside from that, the mention of a "considerable debate" regarding the FY27 increases in the TBAC Reports stands out. I still believe this noise will likely be sorted out in the upcoming QRA next January and ultimately put into action around the second quarter.

It's the holiday here in SK, so the markets are officially closed through today. But there's no real luxury to enjoy the holiday right now, lol... I meant to keep my thoughts short, but one thought led to another, and it ended up being a pretty long post... Treasury yields have risen sharply once again. The 7Y auction was generally disappointing. Looking back, the 5Y and 20Y auctions were particularly disappointing this year, and the 7Y auction was no exception. I would like to share a few thoughts on rates positioning. Over the past several days, real yields have risen by more than 50bp. The intensification of ongoing conflicts, repeated episodes in which hopeful headlines have quickly faded, and the opening of new fronts have all created a highly unfavorable environment for inflation. Against this backdrop, the behavior of several assets caught my attention, particularly the DXY. The dollar has not appreciated as much as interest rate differentials would otherwise suggest. Precious metals have also undergone a correction, but their underlying support levels have remained largely intact. I have experienced similar situations quite a few times before. That said, I do not believe we are currently witnessing a full-fledged forced liquidation mechanism driven by stop-loss selling. At least not yet. However, the risk of such a mechanism developing could increase substantially. This is why I still believe that maintaining an appropriate hedging mechanism is the most prudent approach. The recent 5Y and 20Y auctions, followed by yesterday's 7Y auction, were clearly not encouraging. More precisely, I would argue that they were among the least favorable auctions we have seen since February and March. Auction weakness cannot simply be dismissed as a reflection of instability in the bond market. It is also a source of pressure on the demand side. Over nearly ten years of trading rates, I have developed a few theories of my own. First, markets essentially behave in a Bayesian manner. Second, rather than focusing on the gloomy forecasts or increasingly aggressive and pessimistic tone of certain economists and commentators, we need to develop a deeper understanding of the endogenous mechanisms operating within the broader financial system. Let me start with the second point. We need to distinguish between different market participants and understand the institutional constraints under which each of them operates. Primary Dealers are required to participate in every Treasury auction, submitting bids for at least their pro rata share based on the total number of PDs. Their bidding prices must also be reasonable relative to the yields prevailing in the When-Issued (WI) market. There are currently 26 PDs, implying a bidding obligation of slightly less than 4% per dealer. However, there is no requirement governing how long they must hold the securities they ultimately receive. The share of Treasury issuance absorbed by PDs had been steadily declining, but their allotment increased substantially to approximately 15.8% in the May auction. Between the announcement date and the auction itself, dealers can sell securities to clients in the WI market. They then cover those short positions at the auction while potentially taking on additional inventory. If an auction tails, dealers may actually profit on the portion they previously sold in the WI market. The problem, however, is the accumulation of unwanted inventory. If market yields continue to rise following a poorly received auction, two major problems can emerge. First, if the futures and swaps used to hedge those positions move beyond an acceptable range, dealers may incur mark-to-market losses on their hedged portfolios. Second, the settlement date for the current 2Y, 5Y, and 7Y auctions is September 30. End of Quarter is typically when dealers seek to minimize their balance sheet usage. In other words, the arrival of new Treasury supply coincides with a period when the system's capacity to absorb additional inventory is at its most constrained. One particularly important issue with futures hedging is the basis between the newly issued security and the CTD bond. If that basis continues to widen, the gains initially generated by an auction tail can disappear from the balance sheet, even when the position is hedged with an appropriate quantity of futures. Swaps present a different set of challenges. Simply establishing a swap hedge does not mean that the problem has been resolved. Dealers must also manage Initial Margin and Variation Margin requirements associated with cleared swaps. When a dealer pays fixed and interest rates subsequently rise, the resulting VM flows should be favorable. Nevertheless, maintaining the entire hedging structure still imposes costs on the dealer. It is also important to understand that convexity becomes increasingly significant as we move further out along the yield curve. Another potential approach is to establish a short position through securities borrowing and selling, commonly involving reverse repo transactions. However, I do not believe this is particularly important to the current discussion. What these hedging mechanisms have in common is that they transform outright interest rate risk into various forms of basis and spread risk rather than eliminating that risk entirely. This creates a potentially dangerous feedback mechanism. If volatility rises sufficiently to threaten a desk's internal risk limits, its available VaR capacity may contract. Dealers may then require larger concessions at subsequent auctions. Those larger concessions can translate into larger auction tails, which may leave dealers with even more unwanted inventory. The process can become self-reinforcing. For now, however, I do not believe this potential risk is particularly elevated. The next group consists of leveraged funds. These investors typically purchase cash Treasuries near the CTD and sell an equivalent amount of Treasury futures on a DV01-adjusted basis. Their cash Treasury positions are financed through the repo market. The mechanics of this trade have already been discussed extensively by many others, so I would rather focus on the other side of the position. On the opposite side of the futures short positions are asset managers holding long positions in Treasury futures. These investors seek duration exposure without deploying substantial cash or balance sheet capacity. Basis traders effectively transform this demand for futures exposure into demand for physical Treasury securities. Because leveraged funds are approximately delta-neutral in numerical terms, outright movements in interest rates are not necessarily their primary concern. Their P&L is instead determined by repo funding costs, basis mark-to-market movements, and margin requirements. Consequently, changes in the dynamics of these three variables tend to trigger relatively rapid responses. If an increase in cash Treasury supply or selling pressure causes cash bonds to become cheap relative to futures, existing Cash Long / Futures Short positions incur basis-related losses. If leveraged investors simultaneously face deteriorating funding conditions and tighter risk limits, they may be forced to sell their cash Treasury holdings and buy back their futures shorts. This can further exacerbate the relative cheapening of cash bonds. The resulting pressure can also transmit losses to dealers' futures and swap hedging books. Some signs of stress can already be observed in this part of the market, but I do not believe they have become particularly explosive at this stage. The third group consists of banks. Banks can classify their securities as Available-for-Sale. These securities are subsequently marked to market, with valuation changes affecting regulatory capital, although the treatment differs for smaller banks. Held-to-Maturity securities, on the other hand, are measured at amortized cost. Selling HTM securities can undermine the justification for their HTM classification, creating institutional constraints on a bank's ability to dispose of these holdings. Economic hedging of interest rate risk is possible, but restrictions on applying Fair Value Hedge Accounting to the interest rate risk of HTM securities can create accounting asymmetries between the derivatives and their underlying assets. Consequently, even when AFS and HTM portfolios carry identical interest rate risk, the incentives governing position adjustments can be quite different. AFS portfolios present a different situation. Since the collapse of SVB, interest rate hedging has effectively become something of a mandate for banks. In other words, banks also need to actively manage their interest rate exposure. And from what I can observe, they appear to be doing so quite diligently. The final group consists of pension funds and insurance companies, which are fundamentally buy-side investors. Of course, certain insurance businesses require specific hedging positions, but for the purposes of this discussion, I would broadly characterize these institutions as buyers. Let me start with pension funds. Defined Benefit pension plans remain influential, and these institutions must account for the market value of their liabilities. In other words, their future liabilities must be discounted to present value. Because the duration of their liabilities tends to exceed the duration of their assets, rising interest rates generally reduce the present value of liabilities by more than that of assets. As a result, their funding ratios improve. Once a funding ratio exceeds a certain threshold, pension funds have an incentive to reduce their exposure to risky assets and purchase long-duration Treasuries, or even longer-duration STRIPS, while also receiving fixed in interest rate swaps. The direction of the risk they need to hedge is a decline in interest rates, not an increase. Since losses on their assets can be offset by gains arising from the reduction in the present value of their liabilities, they generally have less need to hedge against rising rates. Insurance companies operate under somewhat similar dynamics. Their liability-matching portfolios can benefit from amortized-cost accounting structures, reducing immediate mark-to-market pressure, while the yields available on newly invested funds increase as interest rates rise. However, there have been exceptions. One notable example was the 2022 LDI crisis. The basic idea was to obtain duration exposure through OTC derivatives, including bond forwards, rather than purchasing the underlying securities outright. I do not work directly in the pension or insurance industry, so I cannot claim to fully understand the extent of the repercussions within those sectors. Nevertheless, I did experience the destructive rise in South Korean 30Y government bond yields that accompanied the unwinding of bond forward positions. Why the Market Cannot Simply Revert to Its Previous Equilibrium The reason I have gone into such detail about these different market participants is to explain why the market cannot simply enter a conventional mean-reversion regime. I am not arguing that interest rate levels themselves must revert. Rather, there are institutional mechanisms through which deviations from certain equilibrium values can gradually converge as different market participants adjust their positions according to their own timelines and constraints. As regulations evolve and different business models continue to develop, we will undoubtedly observe market patterns that differ from those of the past. Nevertheless, we need to understand that the trade-off functions governing these different participants cannot be reduced to a single factor such as "interest rates are rising." Now, let me return to my first point. Bayesian markets. Well, I believe this is precisely where the market is currently directing almost all of its attention. And I completely agree with the market's interpretation in this respect. The scope of the conflict has expanded from Iran and the United States to include Saudi Arabia and the Houthis. Meanwhile, the intensity of the Russia-Ukraine conflict has also increased. Naturally, the market perceives a significantly greater threat from inflation. We have already seen indications of this in the latest S&P Global PMI, and I suspect that the upcoming Beige Book will reveal a similar trend. Against this backdrop, I believe the substantial increase in the perceived probability of an October rate hike is entirely understandable. There is another point worth highlighting. The market needs time to digest the unanimous rate hike at the September FOMC meeting and the accompanying dot plot. Federal Reserve officials, including those traditionally regarded as dovish, are now entering a period in which they need to provide justification for their policy decisions. Their individual tones may differ, but they will need to communicate a broadly consistent view. This is a phase that the market inevitably has to work through. Personally, I regard the next six weeks or so as a particularly important event horizon. Several major developments are aligned within this window: a potential agreement between the United States and Iran, Israel's election, China's Fifth Plenum, and the US midterm elections. We need to work through this period first. During this window, I believe the balance of risks remains tilted toward higher interest rates. At the same time, this is also the period in which the conditions for a reversal are most likely to emerge. What Does a Strong Economy Actually Mean? There are also several issues we need to consider when discussing the idea that the economy is doing well. The initial effects of tax refunds and tariff-related fatigue have largely passed. At the same time, the United States hosted the World Cup before the geopolitical conflicts intensified further. Prices are rising, and the central question is whether supply-side pressures will generate meaningful second-round effects. Is that really possible? To answer this question, we need to examine several economic indicators. The most important, in my view, is the growth of disposable income. No matter how substantially AI investment boosts reported GDP, or how much GDI increases, we are all familiar with the fundamental distributional identities of national income accounting. Can all the forces currently at work in the economy really justify a cumulative 100bp of rate hikes, including the most recent increase? Wasn't the K-shaped economy the central concern for all of us just a few months ago? Even if tax refunds generate a permanent increase in disposable income for certain segments of the population, can we really be optimistic that overall disposable income growth will be sufficient to sustain the inflationary pressures the market is currently anticipating? What I am trying to say is that, no matter how heavily the market weights the most recent information, the expectations derived from that information still need to be validated. And validation inevitably takes time. The problem is that, during this process, the various sources of noise and uncertainty we face are never static. A Few Thoughts on Bessent and the Treasury Market Whenever I see criticism of Bessent's statements and actions, I find myself having somewhat mixed feelings. If we have reached a point where people believe that one individual can manipulate the entire market, then we really are living through extraordinarily turbulent times. I have seen all sorts of claims, ranging from the idea that the Treasury will stop issuing long-term securities altogether to suggestions that it will substantially expand the scale of buybacks or attempt to impose financial repression. The signals surrounding Treasury buybacks, along with some of Bessent's specific remarks, have undoubtedly invited these unnecessary speculations and accusations. In my view, that was a mistake on Bessent's part. And it takes very little time for such speculation and criticism to spill over into a broader loss of confidence in the central bank. What I find particularly interesting, however, is that the actual market impact of any individual policy choice is, from a common-sense perspective, likely to be relatively marginal. I do not believe the problem currently confronting the rates market can be explained as a simple linear combination of a handful of factors. And, frankly, I personally do not expect to realize profits on my positions in 2026. As we move into 2027 and continue to validate some of these underlying assumptions, we will eventually find out whether I have been completely wrong or whether the market's expected path will begin to stabilize.

I completely misjudged the NFP. The print actually looks quite good. Therefore, I think the market reaction itself is very reasonable. I'm not reading too much into the rebound of the NFP headline number itself. Since I wasn't overly fixated on the July print, the rebound in Total NFP wasn't all that shocking to me. However, what I paid close attention to today was AHE. It seems quite significant that AHE showed slight rebound momentum, even when factoring in the revisions. Now, we just need to see if this kind of data can be sustained for two or more releases. What I am curious about, though, is whether the Participation rate will maintain this level going forward. A UBS report covered this in quite some detail, but seeing it persist like this for several months... is a bit puzzling. As for my positioning, I plan to wait it out until the upcoming CPI print. The immediate loss on my positions is quite painful, but this was due to an incorrect forecast for the print; I think it's still too early to say that my overall thesis has been significantly compromised.