Nomura McElligott PRIMING THE PUMP BUT ITS GOTTA GET WORSE FIRST 20 Aug 2026

Nomura McElligott - PRIMING THE PUMP...BUT IT'S GOTTA GET WORSE FIRST 20 Aug 2026 Charlie McElligott · Nomura · Managing Director, Cross-Asset Strategy Thu 20 Aug 2026, 8:48am ET

Some initial position cleansing in Rates after the “Buyback” surprise (a few steepener unwinds, although some fresh risk into flatteners), yet desk flows largely looked to fade the initial impulse rally in the long- end…Gold / Bitcoin up, USD down as is rational…but today, the market is back to slicing-through the announcement moves, largely as a function of the worsening situation with the Iran quaqmire as it relates to Energy and “Downstream / Refined” -products and potential for yet-another Inflation “Tail” -impulse, so back to bear-steepening in Rates as traders press Bessent and a currently de-fanged Fed, while Equities cannot hold their earlier overnight rally…

Post the cringingly executed Treasury’s “Buyback” directive announcement (“By At LeAsT dOuBlE”??? …And how about the title seemingly accidentally forgetting to include the word “Buyback”???—bad day to be a first year in the Treasury media comms team), we saw a massive “Gold Up, Dollar Down” - impulse (and hey, even Bitcoin showing signs of life too)…as they have been acting as “Pressure-Release Valves” for the attempts at stabilizing the messy Rates predicament which US authorities are dealing with, as we obviously crossed the Administration’s rubicon w.r.t. the velocity of the UST Long-End repricing

The particulars of the Treasury “Buyback” itself are irrelevant / de minimis, and reality is that this by-itself is a “Band-Aid on a Bullet Hole”…But what matters here is that it was a signaling exercise from Bessent that “Losing the Long-End” is a non-starter from here on out, and that monetary and fiscal -Authorities are capitulating into more activist / interventionary -posture now as we move forward

The mounting headwinds for the Rates market were increasingly stacking in non-linear -fashion: Not just with this larger thematic “Crowding-Out” of UST Duration buyers -phenomenon (how much can Private balance sheets continue to absorb), with the impulsive AI financing and Corporate Credit “supply deluge” (with YoY Corp issuance +59% and total IG supply YTD @ $1.7667T), the implications of Japan’s current predicament and the impact it’s having on prior assumptions of UST supply / demand -dynamics…but also, the slower-moving Term-Premia add-on from aggregate global sovereign “Fiscal Largesse” and unchecked deficit spending, further amplifying the already “sticky” -state of Inflation, particuarly into the new world order where national security is re-shoring supply chains, controlling critical resource access and obtaining energy independence to win the “AI Cold War” for the future Economy

And even more acutely / idiosyncratically as part of this aforementioned “Donroe Doctrine,” the almost certain re-escalation of the previously back-burnered “Energy Shock” -scenario with the Iran / Straits quagmire, with the much-socialized “Diesel Crack Spreads to new highs” -reality then risking a body-

blow to global Industry and Manufacturing…i.e. there’s no magic “release the inventories” -button to push, as things like SPR hold Crude, not Refined Product -outputs, bc those degrade

This recalibration of attention onto Crack Spreads is credible, because it reflects that the bottlenecks have too shifted from raw extraction and volume…to now, the ugly realities of impaired refining capacity and “Downstream” conversion into the stuff the global economy runs-on: Fuel for shipping, freight, jets, agriculture, construction, and “making things” in general…which means the risk of “impulsive” higher prices and then, pass-through to goods, food, logistics…

EUROPEAN GAS PRICES HIT €65/MWH FOR THE FIRST TIME SINCE MARCH

Which is at least a partial contributor to this immediate issue below:

GERMAN 5-YEAR YIELD UP 1BP TO HIT 3% FOR FIRST TIME SINCE 2008

In other words, the Inflation “Tail” is fattening when we are already seeing Rates coming under attack for a variety of flow and structural -issues

So again, this “statement of intent” from Authorities with the “Buyback” signaling now transitions the “big picture” sequencing…