US 10-year Treasury yields are now up 21 basis points from PCE lows, and you have to wonder: what would it have looked like if Friday’s inflation data had been bad in good place?
Yields are now at a one-month high and rising along the curve; which is helping to boost the US dollar.
Why?
1) End of quarter
It is always difficult to read movements around the end of the quarter. In early April, we also saw a big rise in yields, with a 15 basis point increase on the first day of the quarter, which continued for a total of 51 basis points to a quarterly high of 4.74 % at the end of April. There are always strange things around the end of the quarter and it makes for a tough read.
2) Japanese sales
We know that Norinchukin Bank will sell $63 billion in Treasuries next year, but we don’t know what the Finance Ministry is planning in terms of yen intervention. I’ve heard arguments on both sides of whether they should 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 boss installed of currency.
3) Stagflation
You can always build an underlying narrative, but I see this as a fight because it’s been accelerating in the last couple of trading days, despite US data saying otherwise. The bottom line is that the hot Canadian and Australian CPI numbers are a precursor to something similar in the US. But — if anything — I would expect the market to look beyond high inflation to a period of very high growth. In any case, draw your own conclusions.
4) Politics
This is a compelling illustration:
10s US after the debate
What has changed since Wednesday when the bond movement really accelerated? The main thing may have been the debate. Now a lot of people will argue that the debates don’t matter, but I’ve never seen this kind of reaction to a debate in the US, and it lines up perfectly with a Republican sweep.
All the television talk is always about the Presidency, but whether or not it involves a purge is much more important to the financial markets and will continue to be so while the House holds the wires.
The political argument is what fixed income analysts at BMO are making:
“The sell-off remains a function of the economic implications from a possible Trump victory in November, and there is nothing immediately on the horizon to suggest anyone should be more bearish,” they wrote today.
5) Policy Part 2
The US is not in a vacuum here. Many eyes are on France and 10-year highs since November on the belief that both the far right and the far left will spend more.
The far right performed worse than expected with 32% to 36% in the polls, but I wonder if the market is trying to resolve the uncertainty of the second round.
10 French
If you look at the platforms, there is some heavy spending by Le Pen. I think this underscores that the old ‘fiscal conservative’ paradigm is dead in the markets. I would argue that this has been true for a while, but could become true again in a hurry if the bond market punishes spending, as it did with Liz Truss. The point is that the burden of overspending will probably 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 indeed have to abandon bonds if a Trump administration raises tariffs. Now I don’t think the market is taking some of the talk about tariffs in an election campaign too seriously, but you can’t rule it out and there is clearly a rift that is turning into an unbridgeable chasm. Whether this turns into a trade war or a real war is a real concern, but we’re certainly not going in the right direction.