The 10-year U.S. Treasury yield is now up 21 basis points from the PCE low, and you have to wonder: What would it look like if Friday’s inflation numbers had been bad instead of good?
Yields are now at their highest levels in the past month and rising across the curve, boosting the US dollar.
Why?
1) Quarter end
It’s always hard to read end-of-quarter movements. Early April also saw a big jump in yields, with a 15bps increase on the first day of the quarter, which continued to total 51bps at the end of April to a quarterly high of 4.74%. There are always oddities around the turn of the quarter, which makes it hard to read.
2) Japanese sales
We know that Norinchukin Bank will be selling $63 billion of government bonds over the next year, but we don’t know what the Ministry of Finance is planning in terms of intervention in the yen. I’ve heard arguments on both sides about whether they should sell government bonds to boost the yen, but it’s certainly a risk and something that people are talking about now that USD/JPY is at a 38-year high and there’s a new currency chief in place.
3) Stagflation
You can always come up with a fundamental story, but I think this is a struggle because it has been accelerating over the past two trading days, despite US data saying the opposite. The main idea is that the high Canadian and Australian CPI figures are a harbinger of something similar in the US. But I would expect the market to look beyond high inflation to a growth-sapping period of excessively high interest rates. In any case, draw your own conclusions.
4) Politics
This is a compelling illustration:
American 10’s after the debate
What has changed since Wednesday, when the bond movement really accelerated? Perhaps the most important was the debate. Now, many people will argue that debates don’t matter, but I have never seen such a reaction to an American debate, and it fits perfectly with a Republican attack.
On television it is always about the presidency, but whether it actually leads to a victory is much more important for the financial markets. And it will remain that way, because the House of Representatives is in control.
The political argument is that of the fixed income analysts at BMO:
“The sell-off remains a function of the economic implications of a potential Trump victory in November and there is nothing immediately on the horizon that would indicate the bear steepener should disappear,” they wrote today.
5) Politics part 2
The US is not in a vacuum here. Many eyes are on France and the 10-year figures are the highest since November, in the belief that both the far right and the far left will spend more.
The far right performed worse than expected, namely 32% compared to 36% in the polls. However, I wonder if the market is having difficulty processing the uncertainty of the second round.
French 10s
If you look at the platforms, you see Le Pen is spending a lot of money. I think that underscores that the old paradigm of the ‘fiscal conservative’ is dead in the markets. I would argue that it has been true for a while, but that it could quickly become true again if the bond market punishes spending, as Liz Truss did. The point is that the burden of overspending is likely to fall on non-US countries, even if it is US spending, because of the special status of the dollar.
6) China
This is mixed with politics, but there is a sense that China will really have to give up bonds if a Trump administration raises tariffs. Now I don’t think the market is taking some of the talk about tariffs too seriously in an election campaign, but you can’t rule it out and there is clearly a gap that is turning into an unbridgeable gap. Whether that turns into a trade war or a real war is a real concern, but we are certainly not going in the right direction.