More verbal intervention warnings by Japanese top officials as USD/JPY holds above 160.00
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The sell-off at the long end of the US Treasury curve was the odd one out yesterday. The US Note future slid from start to finish with tenors from 7- to 30-yr adding around 8 bps. From a technical point of view, this lifts the 10-yr yield away from the recent lows/support zone near 4.20%. The front end of the curve (2-yr) is still stuck near 4.70%. Yesterday’s move stood out given that it occurred in what was mostly a risk-off session with European stock markets throwing away opening losses, the dollar marching to new short-term highs and French assets underperforming. The move also occurred in the run-up to tomorrow’s May PCE deflators which should be a benign outcome after May CPI releases. On top, it coincides with the traditional build-up towards the end-of-quarter which often sees beneficial flows towards bonds. Our best guess for yesterday’s underperformance of US Treasuries has to do with tonight’s presidential debate between Biden and Trump. None of them seems to have reigning in ailing public finances as a top priority. On the contrary, fiscal policy could remain expansionary. Former NY Fed governor Dudley highlighted the matter again yesterday in an opinion piece. Markets tend to forget that the CBO last week upgraded the fiscal 2024 budget deficit forecast from $1.5tn to $1.9tn. To know that longer-term studies by that same Congressional Budget Office already point at budget deficits of more than 5% of GDP for the next 30 years. In this respect, Dudley warns that the more the government borrows, the greater the change it’ll end up in a vicious cycle in which government debt and interest rates drive one another inexorably upward. “It’s impossible to know when investors will decide that such risks are too much to bear, as the bond vigilantes famously did in the 1990s. When it happens, it tends to be sudden and brutal”.
News flow is thin this morning apart from more verbal intervention warnings by Japanese top officials as USD/JPY holds above 160. EUR/USD trades south of 1.07 and is likely to stay there ahead of and after the first round of French parliamentary elections (Sunday). We keep a close eye at the long end of core bond curves to see whether yesterday’s move was a one-off repositioning or whether more is at hand. Apart from the above-mentioned presidential debate, the eco calendar contains EC confidence data, US weekly jobless claims and durable goods orders. We don’t expect these figures to be of any importance. The US Treasury concludes its end-of-month refinancing operation with a $44bn 7-yr Note sale and there are policy meetings in Sweden, Turkey and the Czech Republic.
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