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• The stakes are high for tonight. The US Treasury sells $39bn of 10-yr Notes as part of its mid-month refinancing operation. The auction occurs against the background of huge volatility, and weakness, in long-term bonds. US Treasuries sell off as some market parties are forced to unwind leveraged positions, with stagflation worries, loss of credibility, weakening public finances and foreign pressure (diverting FX reserves away) adding to the perfect storm. The US 30-yr yield this morning tested the psychological 5% mark (YtD top). Apart from a brief spell in 2023 (5.18% top), it’s been since 2007 that the very long end traded at higher levels. Even if tonight’s auction doesn’t raise market stress, there remain serious hurdles later this week with March US CPI inflation, a $22bn 30-yr bond auction and the April University of Michigan consumer survey. As a reminder: a failed 30-yr bond auction and evaporating liquidity served as a catalyst at the height of the Covid pan(dem)ic for Fed intervention. These included reopening the Primary Dealer Credit Facility to help keep primary dealers play their role during times of stress, relaunching the Money Market Mutual Fund Liquidity Facility to backstop those funds or providing more unlimited liquidity through the Commercial Paper Funding Facility. Similar action is possible this time around, but other initiatives like steep rate cuts or shifting back to quantitative easing are less likely at the moment given the completely different inflation (outlook) compared to March 2020. The sell-off in longer Treasuries spread to other bond markets as well. The Japanese 30-yr yield closed 17 bps higher (+27 bps intraday), reversing some of the move higher on talk of a meeting between the BoJ, MoF and FSA on measures to maintain market stability. The UK 30-yr yield adds over 25 bps at the moment, pushing it to the highest level since 1998. During the September 2022 Gilt sell-off (unfunded mini budget by Truss-Kwarteng), the BoE was equally forced to take emergency action to calm turmoil (long-term bond buying). Corporate (both HY and IG) and sovereign bond spreads are widening. Damage on European bond markets remains contained for now. The EU 30-y swap rate adds 5 bps with the German 30-yr yield broadly unchanged. A wide range of ECB governors hit the wire. Apart from ECB Holzmann, they all favour action next week (25 bps rate cut being our preferred scenario). Views diverge beyond April depending on the focus on either downside growth risks or upside inflation risks. For now, we stick to the long pause idea beyond April, even as EMU money markets discount an ECB rate bottom around 1.5% by the end of the year.
• Nervousness in the bond market triggers more risk aversion on stock markets with the escalating trade war adding to a worsening sentiment. China raised tariffs on US goods to 84% while the EU adopted tariffs on €21bn of US goods in the metals dispute. Risks are for president Trump to announce “major tariffs on pharmaceuticals” soon. European stock markets suffer another 3%+ setback with US indices opening flattish after yesterday’s swoon. Brent crude prices traded below $60/b for the first time since early 2021. The US dollar loses ground across the board against JPY (USD/JPY < 145), the euro (EUR/USD 1.1070), CHF (USD/CHF testing 2023 & 2024 lows; weakest since dropping EUR/CHF 1.20 floor in 2015), but also smaller currencies like CAD, AUD or NZD. Weakness in UK gilts hits sterling with EUR/GBP extending this week’s rally to 0.8660 (from 0.8350 on the eve of “Liberation Day”).
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