What catches most attention this morning: A violent sell-off at the long end of the JGB curve

Markets

Greenland and all of its geopolitical consequences were top of mind yesterday. Trump slapped EU/NATO allies with an additional 10% import levy, to be raised to 25% in June, until a deal/sale of the much-wanted island is reached. The blatantly coercive move prompted a backlash from European officials which now threaten to halt the approval of the US/EU trade deal, discuss tariffing some €93bn of US goods and mull to deploy the anti-coercion instrument. The latter is the nuclear option and is only to be used as a last resort, only when the diplomatic route (Davos talks!) has been exhausted. US President Trump this morning said that he will meet with several parties during the upcoming World Economic Forum, hailing that he had a very good phone call with NATO secretary general Rutte.

While the Greenland crisis will continue to play this week, it’s something else that catches most attention this morning: a violent sell-off at the long end of the JGB curve. The Japanese 30-yr yield adds 24 bps. The Japanese 40-yr yield rises by a similar amount, breaching 4% in the process (4.21%). The Japanese long end is suffering ever since PM Takaichi won LDP leadership elections end last year. The move accelerated on rumours about snap elections to cement her position (regaining absolute majority in lower house) and push through a stimulative fiscal agenda. An election date has been set for February 8. This week, a proposal to suspend the sales tax on food (8%) for two years sent long term JGB’s into tailspin. Weak demand at this morning’s 20-yr bond sale added fuel to the fire. There are spill-over effects to other bond markets. Both German and UK yield curves steepened yesterday with the long end adding around 3 bps. US markets reopen after the long weekend (Martin Luther King Day) with the US 10-yr and 30-yr yields immediately 4.4 bps and 6.3 bps. The US 10-yr yield confirms last Friday’s technical break above important resistance at 4.2%. The US 30-yr yield (4.9%) rises to its highest level since early September with the psychologic 5% mark rapidly coming on the radar. Apart from the Japanese sell-off, the Greenland crisis also brings back echoes to the Q2 sell America trade. EUR/USD gradually creeps higher, from a 1.16 close last Friday to currently 1.1670. France adopting a budget (see below) is slightly supportive for the euro-side of the equation.

UK labour market data kicked off this week’s busy calendar this morning. The unemployment rate stabilized as expected at 5.1%. Employment change in the three months to November rose by a stronger than expected 82k (3M/3M), but monthly payrolls for December (-43k) disappointed. Overall, the employment data printed near consensus, leaving no traces on UK markets. EUR/GBP is marginally higher this morning, shadowing the EUR/USD move. There are no other meaningful data releases today. We especially eye the fate of the long end of the UK/German/US yield curve to shape overall market moves. 

News and views

Boris Vujcic, the head of the central bank of Croatia, secured the backing from EMU Finance Ministers to become next ECB vice president. In this role he will replace Luis de Guindos from June 1^st. It is the first time that a member from a former Eastern European country will obtain a seat in the six-member executive Board of the ECB. The appointment still has to be formally approved by the leaders of the European Union but they are expected to join the assessment of the Finance Ministers. Boris Vujcic is seen as one of the more hawkish members within the spectrum of ECB policy makers. Within the board, the positions of president, chief economist and head of market operations will also become vacant next year

French Prime Minister Lecornu invoked Article 49.3 of the constitution to adopt the 2026 budget without a vote in parliament. The government is now expected to face a no confidence vote on the use of the Article 49.3. The Socialist Party, which holds a small, but decisive, number of votes, is expected to abstain after getting more concessions on spending and taxes. That way, the absolute majority needed to topple the government is very unlikely to be reached. The government aims to cut the deficit from 5.4% of GDP last year to about 5% of GDP this year. 

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