Yields on the 10-year U.S. Treasury note are now up 21 basis points from PCE lows. It makes you wonder: What would it have looked like if Friday’s inflation numbers had been bad instead of good?
Yields are now at a one-month high and rising across the curve; which helps boost the US dollar.
Why?
1) Quarter end
It’s always hard to read moves around the end of the quarter. Early April also saw a big rise in yields, with a 15bp increase on the first day of the quarter, which continued up 51bp to a quarterly high of 4.74% at the end of April. There are always quirks around the turn of the year, and that makes for tough reading.
2) Japanese sales
We know that Norinchukin Bank will sell $63 billion in Treasuries in the next year, but we don’t know what the Treasury Department plans to do in terms of yen intervention. I’ve heard arguments from both sides about whether to sell Treasuries to boost the yen, but it’s certainly a risk and something people are talking about with USD/JPY at 38-year highs and a new currency chief in place.
3) Stagflation
You can always make a fundamental story, but I find this a struggle as it has been accelerating over the past two trading days despite US data saying the opposite. The main idea is that the hot Canadian and Australian CPI numbers are a harbinger of something similar in the US. But I would rather expect the market to look beyond high inflation to a period of excessively high interest rates that undermine growth. In any case, draw your own conclusions.
4) Politics
This is a compelling example:
American 10s after the debate
What has changed since Wednesday, when the bond movement really accelerated? Perhaps the most important thing was the debate. Now many people will argue that debates don’t matter, but I’ve never seen such a reaction to an American debate and it fits perfectly with a Republican victory.
All the TV talk is always about the presidency, but whether or not there is a sweep is far more important to the financial markets and will continue to be so now that the House is in control.
The political argument is that of the fixed income analysts at BMO:
“The sell-off continues to reflect the economic fallout from a possible Trump victory in November and there is currently no indication that we need to ease the downward trend,” they wrote today.
5) Politics part 2
The US is not in a vacuum here. There are many eyes on France and the decade there is the highest since November, based on the belief that both the far right and the far left will spend more.
The far right underperformed, at 32% versus 36% in the polls. However, I wonder if the market is having trouble processing the uncertainty of the second round.
French 10s
If you look at the platforms, there are some heavy spenders from Le Pen. I think this underlines that the old paradigm of the ‘fiscal conservative’ is dead in the markets. I would say this has been true for a while, but it could soon become true again if the bond market punishes spending, as it did with Liz Truss. The point is that the burden of overspending will likely be borne by non-US countries, even if it is US spending, because of the special status of the dollar.
6) China
This is woven into the politics, but there is a sense that China will really have to give up bonds if a Trump administration raises tariffs. I don’t think the market is taking too seriously some of the talk about tariffs in an election campaign, but you can’t rule it out and there is clearly a schism that is turning into an unbridgeable divide. Whether that turns into a trade war or a real war is a big concern, but we are certainly not going in the right direction.