The very long end of global yield curves continues to catch most attention

KBC Market Research Desk KBC Bank

Markets

The very long end of global yield curves continues to catch most attention. The US yield curve bear steepened yesterday in absence of any particular economic or monetary input. Daily changes on the curve ranged between +0.6 bps (2-yr) and +4.7 bps (30-yr). The US 30-yr yield yesterday topped 5.3% for the fist time since the eve of the financial crisis in 2007. The German and UK curves moved in parallel fashion, but intraday changes were slightly less outspoken. The UK 30-yr yield closed at its second highest level since 1998 with the German equivalent at the most elevated point since 2011. The same goes for the 30-yr EU swap rate. The Japanese 30-yr yield is inches away from the 4.2% top which is the highest in its 27-yr history. Yesterday, both real yields and inflation expectations inspired the latest leap higher. The normalization of term premia in the face of deteriorating public finances and the absence of central bank bond buying started becoming a theme again as governments start readying draft budgets for next year. The massive amount of corporate bond supply to fund the AI boom might also have its effect. Inflation premia mimic energy prices. Brent crude cleared the $91/b hurdle for the first time in over a month as US President Trump says that he is in no hurry to reach a deal with Iran. The problem being that Iran holds that view for longer already, having withstand two spans of military attacks and economic blockades. Iran-backed Houthi rebels are also escalating attacks along the Red Sea coast including the Strait of Bab al-Mandeb. Rising (real) rates triggered some caution on equity markets yesterday with key benchmarks correcting up to 0.5% lower both in the US and in Europe. The dollar failed to profit from these settings (higher oil price, weaker risk sentiment) with higher yields obviously being an expression of higher US risk premia. EUR/USD even went for the 1.16 resistance area, but the first attempt to break the barrier failed. EUR/USD closed at 1.1580 from a start at 1.1564.

Yesterday’s market themes will remain in play today given the second-tier eco calendar. US (June!) housing and production data and German ZEW investor sentiment won’t move the market needle. ECB Chief Economist Lane joins a panel discussion `Monetary Policy in a Geopolitically Fragmented World' which could provide some interesting headlines. A September ECB rate hike is already discounted though. This morning’s UK labour market report was mixed with slightly slower than expected employment growth, but somewhat stronger wage growth. Sterling is unbothered at EUR/GBP 0.8555.

News and views

Data from the US Treasury Department yesterday showed that foreign holdings of Treasuries fell in June. The total amount slipped from $9371 bn to $9299 bn. Foreign holdings were up 2.3% compared to a year earlier though. The monthly decline was led by Japan, the UK and China. While remaining the biggest non-US Treasury owner, Japanese holdings eased 2.3% from May to $1116 bn. The peak stood at $1325 bn in November 2021. The UK comes in second. Its holdings fell 1% to $940 bn. China takes the third place, even as its Treasury assets fell by 13% over the past year. In a monthly perspective, holdings dropped a solid 4% to $633bn, the lowest since September 2008.

Brazil’s finance minister Durigan in a Bloomberg interview said investors are raising legitimate questions about government finances, in particular the unsustainable trajectory that it needs to address. Durigan has been trying to sooth market concerns in a series of meetings and interviews since taking over the job from his predecessor Haddad in March. Things have been escalating over the course of last week, when polls showed that president Lula da Silva is consolidating his front-runner position over his main competitor Bolsonaro. The prospect of a victory by the leftist Lula is fueling fiscal uncertainty and has kept inflation expectations above the 3% central bank target for the foreseeable horizon. Brazilian assets have paid the price with amongst others the real having depreciated from USD/BRL 5.08 to 5.20 yesterday. The country’s main stock index slid around 3.5% over the same period. The Brazilian yield curve has added between 8 and 20 bps in bear steepening fashion over the past week.

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KBC Market Research Desk

KBC Bank

KBC's Market Research Desk publishes a number of short-term reports.

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