U.S. 10-year Treasury yields are now up 21 basis points from PCE lows, and you have to wonder: What would it look like if Friday’s inflation data was bad instead of good?
Yields are now at a monthly high and rising across the curve; which helps strengthen the US dollar.
Why?
1) End of quarter
It’s always hard to read quarter-end moves. We also saw a big move in yields at the start of April, with a 15 basis point gain on the first day of the quarter, which continued up a total of 51 basis points to a quarterly high of 4.74% at the end of April. There are always quirks at the turn of the quarter, which makes it a tough read.
2) Japanese sales
We know that Norinchukin Bank will sell $63 billion worth of Treasuries next year, but we don’t know what the Treasury is planning in terms of yen intervention. I’ve heard arguments on both sides of whether they need to sell Treasuries to strengthen the yen, but it’s certainly a risk and something people are talking about with USD/JPY at 38-year highs and the introduction of a new currency boss.
3) Stagflation
You can always build an underlying story, but I see this one as a fight as it has accelerated over the last two trading days, despite US data saying otherwise. The main idea is that the hot Canadian and Australian CPI numbers are a harbinger of something similar in the US. But – if anything – I would expect the market to look beyond high inflation to a period of too high rates that dampens growth. In any case, draw your own conclusions.
4) Politics
This is a compelling illustration:
US 10s after debate
What has changed since Wednesday when bond moves really picked up? The main one may have been the debate. Now, a lot of people will argue that the debates don’t matter, but I’ve never seen such a reaction to a debate in the US, and it fits perfectly with the Republican surge.
All the TV talk is always about the presidency, but whether or not it involves a sweep is far more important to the financial markets, and will continue to be because the House holds the strings.
The policy argument is one made by fixed income analysts at BMO:
“The sell-off remains a function of the economic fallout from a potential Trump victory in November, and there is nothing on the horizon to suggest the bearish steeper should fade,” they write today.
5) Politics Part 2
The US is not here in a vacuum. Many eyes are on France, the most since November in 10 years, as they believe both the far right and the far left will spend more.
The far right fared worse than expected in the polls at 32% to 36%, but I wonder if the market is trying to overcome the uncertainty from the second round.
French 10s
If you look at the platforms, Le Pen spends a lot of money. 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 it could become true again in a hurry if the bond market punishes spending like Liz Truss did. The point is that non-US countries are likely to bear the brunt of the excess spending, even if it is US spending, because of the special status of the dollar.
6) China
This is mixed with politics, but there is the idea that China will actually have to give up bonds if the Trump administration raises tariffs. I don’t think the market is taking some of the talk about tariffs in the election campaign too seriously, but it cannot be ruled out and there is clearly a schism that is turning into an unbridgeable chasm. Whether it turns into a trade war or a real war is the real issue, but we are definitely not going in the right direction.