while WE slept: USTs BID (Bunds lead); 'dont fight it' (where 'IT' is equity bid, -MS); defaults may rise if funding costs don't fall (but not all bad -DB); steeper curve compensates uncertainty (MS)
Good morning … With equity futures ‘little changed’ ahead of trade talks and ‘flation data on deck this week (interesting that bonds are bid — newsquawk, below, would pin bond bid to Bunds …) I’ll be brief.
This weekend’s note had visual of front-end with a more bullish look and feel. Ahead of this weeks duration supply ($58bb 3s, $39bb 10s and $22bb Bonds), the front end might very well offer a port in the supply storm … Rolling that logic a bit further out, a check of pulse in The Belly …
5yy: bullish TLINE break and a 55wMA (4.073% resistance) hold …
… as momentum remains biased / leaning towards HIGHER yields as path of least resistance …
… the DAILY has much the same look (bullish break, 55dMAdown at 3.98 — resistance / bearish HOLD) but may still be that port in a storm IF you dismiss NFP headlines and dig deeper and ‘buy’ narratives of slower economy.
One must not (IMO) dismiss these and do your own work…I’ll quit while I’m behind and move along TO some of the narratives readily avail on Global Wall but first … here is a snapshot OF USTs as of 705a:
… for somewhat MORE of the news you might be able to use … a few more curated links for your dining and dancing pleasure …
NEWSQUAWK US Market Open: Fixed bid, USD on the backfoot & RTY gains ahead of US-Iran and US-China updates … US paper is attempting to atone for Friday's losses which were brought about by the firmer-than-expected US jobs report, which avoided the soft outcome that some in the market had been positioning for. Quiet schedule today, but focus will be on the US-China meeting in London today; time still not disclosed. Sep'25 UST contract has been as high as 110.05+ but is some way off Friday's peak at 110.29+ … Bunds have very much started the week off on the front foot and are leading global fixed income markets higher. From a fundamental perspective, fresh macro drivers for the Eurozone are lacking following the hawkish reaction to last week's ECB policy announcement. We have seen further commentary from Bank officials over the weekend with Nagel noting that the central bank has maximum flexibility on rates, whilst Schnabel stated we should not expect a sustained decoupling between the ECB and the Fed. Sep'25 Bunds have eclipsed Friday's best at 130.77 with focus on a test of 131.00.
Reuters Morning Bid: London showdown
…Today's key chart
Graphics are produced by Reuters.
China's export growth slowed to a three-month low in May as U.S. tariffs slammed shipments, while factory-gate deflation deepened to its worst level in two years, heaping pressure on the world's second-largest economy on both the domestic and external fronts. While the trade story has hogged the spotlight this year, the deflation picture has been brewing for several years, partly because the country's property bust has depressed domestic demand.
Finviz (for everything else I might have overlooked …)
Moving from some of the news to some of THE VIEWS you might be able to use… here’s some of what Global Wall St is sayin’ in addition TO NFP recaps / victory laps (HERE) …
With talks between US and China in London, some news from the Far East worth considering (as it may / may not drive decisions and motivations) …
We think four consecutive months of CPI deflation and 32 months of PPI deflation are a reflection of demand recovery still lagging supply indicators. We now expect 2025 full-year CPI inflation to stay at the post GFC low of 0.2% (vs our prior forecast of 0.4%) for the third consecutive year.
• May: -0.1% y/y for CPI, and -3.3% y/y for PPI
• Bloomberg consensus forecast (Barclays): -0.2% (-0.2%) y/y for CPI, and -3% (-2.9%) y/yfor PPI
• April: -0.1% y/y for CPI, and -2.7% y/y for PPI
9 June 2025 Barclays: China: Slower but still resilient exports
The slower but still resilient May exports reflect some offsetting factors - continued trans-shipments via Asean, and exporters finding alternative buyers in the rest of world - to the slumped exports to the US. We expect exports to remain resilient in June before slowing visibly in H2.
• May: 4.8% y/y for exports, and -3.4% y/y for imports (both in USD terms)
• Bloomberg consensus (Barclays): 6% y/y (6.5%) for exports, and -0.8% y/y (-0.2%) for imports
• April: 8.1% y/y for exports, and -0.2% y/y for imports (both in USD terms)
Post liberation day and we’re doin’ OK (?) …
08 JUN 2025 BNP: Sunday Tea with BNPP: Emerging stronger after Liberation Day
KEY MESSAGES
We view the US deficit impact from tariffs and the proposed tax bill as ultimately less than feared. We suggest staying in conditional 2s10s bull flatteners, which work well in our core views but do not lose if a “Liz Truss moment” materializes.
We see the ECB pausing in July before delivering one more rate cut in September. We continue to suggest steepeners in the eurozone that position for near-term downside risks from tariffs and long-term upside risks from the fiscal boost.
We remain positive on the EUR, reinforced by the meaningful rise in Danish pension funds' increasing USD hedges and continued focus on regional fiscal improvement.
Excessive bearishness in oil markets allowed crude prices to rise last week despite an OPEC8+ production hike announcement. We expect this resilience to last through summer but ultimately fade, with a year-end Brent target at $60/bbl
A couple / few items this morning from a rather large German institution…
… our 2022 edition marked a turning point. We argued that the ultra-low default world was ending, as inflation and term premia were pushing nominal and real yields structurally higher. While we haven’t yet seen a cyclical spike in defaults—largely due to the avoidance of a US recession—there are clear signs that higher-for-longer funding costs, especially in the U.S., are taking a toll. Leveraged loan issuer-weighted default rates are not far off COVID-era levels, and issuer-weighted defaults in the B and CCC rating buckets are now running above their post-2004 averages, even after two years of solid economic growth. In short, regardless of the cyclical backdrop, we believe the ultra-low default era that characterised much of this study’s first 25 years is now behind us.
After leading this report since its inception, I’ve handed the reins to Steve Caprio and his team, who have compiled this year’s edition. While the authorship has changed, the structural conclusions remain consistent. Marrying these with a cyclical view, Steve’s team projects that US spec-grade default rates should decline modestly from 4.7% today to 4.4% by year-end 2025, before rising again to an above consensus 4.8% by Q2 2026—with potential upside risk toward 5–5.5%. While Europe’s outlook is more benign, the region will not be immune to the structural shift underway. See the full report here including all the usual charts and tables showing how credit spreads compare to that required to compensate for default risk.
The highlight this week will be US CPI on Wednesday and a resumption of trade talks between the US and China today in London. Bessent, Lutnick and Greer are set to meet Chinese representatives at the meeting today. So it's all the big guns from the US administration. The monthly 30-yr UST auction on Thursday will also be a heavy focus with all the attention on the long-end in recent weeks. There's a 10yr auction the day before as well. So a good test of demand as the fiscal bill meanders its way through Congress. Before we preview the CPI release the other main highlights this week are the NY Fed 1-yr inflation expectations today; US NFIB small business optimism, UK employment data and Danish and Norwegian CPI tomorrow; that CPI, the 10yr UST auction and the UK Spending Review on Wednesday; US PPI, US jobless claims, UK monthly GDP, the 30yr UST auction and my birthday on Thursday; and the UoM consumer sentiment (including inflation expectations) on Friday. A fuller day-by-day diary of events is at the end as usual.
With regards to US CPI, our US economists expect weak seasonally adjusted gas prices to again keep the headline rate (+0.20% forecast vs. +0.22% previous) gain below that of core (+0.31% vs. +0.24%). This should help the YoY rate for both headline and core to rise two-tenths to 2.5% and 3.0%, respectively. Shorter-term trends for core would be mixed with the three-month annualised rate rising by three-tenths to 2.4% while the six-month rate would remain steady at 3.0%. Our economists do expect tariffs to begin to impact core goods prices, especially in categories like household furnishings and supplies where we saw potential preliminary tariff impacts in the April data. On the services side, our economists will be most attuned to the volatile categories like lodging away and airline fares that have been a meaningful drag of late. For PPI the following day, our economists expect a +0.27% increase in May which would reduce the YoY rate by a couple of tenths. As ever, how the subcomponents that feed into core PCE come out will be the most interesting part of the release. Note that the Fed are now on media blackout ahead of next Wednesday's (18th) FOMC.
It's not clear that the Fed will have learnt too much more than they already knew from Friday's payrolls data. May headline (+139k vs. 147k) and private (140k vs. 146k) payrolls were slightly above the 126k consensus but -95k of net revisions to the two previous months softened the beat. Our economists point out that we now have very stable private sector hiring trends over the past three (133k), six (146k) and twelve (122k) months. However they also point out the narrow breadth in job growth as health care / social assistance (+78k) and leisure / hospitality (+48k) continued to drive the majority of private sector job gains in May and have accounted for 75% of private job growth over the past twelve months. See our economists US employment chart book here that came out after the report on Friday for much more. Staying on employment there will be increased attention on claims this week given the recent tick up. It's not clear whether its seasonals or evidence that there is some real time slipping in employment trends.
… Over the years, it has evolved into a framework for presenting our structural, multi-year view on the default outlook. For over a decade until 2022, that structural view held that—aside from cyclical spikes—we were living in an ultra-low default environment. This was driven by factors such as low nominal and real yields, aggressive monetary intervention (e.g., QE), and a persistent global savings glut.
However, our 2022 edition marked a turning point. We argued that the ultra-low default world was ending, as inflation and term premia were pushing nominal and real yields structurally higher. While we haven’t yet seen a cyclical spike in defaults—largely due to the avoidance of a US recession—there are clear signs that higher-for-longer funding costs, especially in the U.S., are taking a toll. Leveraged loan issuer-weighted default rates are not far off COVID-era levels, and issuer-weighted defaults in the B and CCC rating buckets are now running above their post-2004 averages, even after two years of solid economic growth.
In short, regardless of the cyclical backdrop, we believe the ultra-low default era that characterized much of this study’s first 25 years is now behind us…
…Higher defaults are not all negative. As we’ve consistently shown, credit spreads tend to more than compensate for historical default risk—except during recessions and for the weakest rating bands. However, the implications are clear: credit selection will become increasingly important. Avoiding the still-small but growing number of defaults will be a key driver of performance….
…Tactical factors say US defaults will start rising again in 2026
09 June 2025 DB: Mapping Markets: How the resilience has continued and why it can last
Despite a couple of wobbles last week, markets remain in a strong position. Global equities have bounced back. The VIX fell to its lowest since February. And in both the US and Europe, IG spreads are at their tightest since March.
This resilience has been driven by several factors; the US jobs report was decent again in May; the US and China are starting trade talks again today; long-end yields have stabilised in the last couple of weeks, easing fears around fiscal policy; and in Europe, the latest data has been more promising too.
Looking forward, there are several reasons why this resilience can continue:
First, global policymakers want a successful outcome from the trade talks, so the incentives are geared away from a recession.
Second, the tariff uncertainty is being increasingly priced in as a fact of life rather than a surprise.
… long-end yields have come down. That’s a positive force in and of itself, because that helps to ease financial conditions and improves the fiscal situation, which in turn helps to support risk assets. Indeed, it was striking last Wednesday that weak US data didn’t lead to a big sell-off, in part because of that channel whereby lower yields relaxed fears about the fiscal situation.
Third, recent monetary easing (and the fact that more is priced) is still filtering through to ease financial conditions.
And fourth, the market recovery itself means we’re avoiding negative wealth effects and tighter financial conditions.
Clearly there’s more event risk coming up, including the 90-day reciprocal tariff extension deadline on July 9. But the market’s resilience to everything so far has been a striking fact in and of itself. And whether it’s trade policy or fiscal policy, financial markets are themselves acting as an important force in determining policy outcomes, because policymakers have demonstrated that they will act to avoid significant market turmoil when it develops.
A steeper curve should help ‘compensate’ for uncertainty …
June 8, 2025 MS: IDEA: Sunday Start | What's Next in Global Macro: A Steeper Yield Curve, a Weaker US Dollar Ahead
Interest rate and currency markets have oscillated in wide ranges over the past two years. Since mid-2023, 10-year US Treasury yields have traversed nearly the entire range from 3.5% to 5.0% five times before settling near the middle of that range – where they sit today. When US Treasury yields rose from the lower end of the range, the US dollar appreciated. And when they fell from the upper end, the US dollar depreciated. Coming into the year, we thought both the US dollar and Treasury yields would break these ranges to the downside – leaving the currency materially weaker and yields materially lower in 2025.
At one point in early April, both calls looked on track. 10-year Treasury yields nosedived from near 5% to below 4% and the DXY index fell 10% – both from their mid-January highs. Since 'Liberation Day' on April 2, however, the US dollar has decoupled from 10-year yields. Instead of appreciating in line with Treasury yields, the US dollar has depreciated, breaking below its two-year range. While this decoupling may not last, we believe it supports our view for a much weaker US dollar ahead. Indeed, in our recent mid-year outlook, The Moments of TRUTHS, we forecast that the DXY dollar index will depreciate by another 9% over the next 12 months.
What about Treasury yields? We expect 10-year yields to fall below 3.5% – the lower end of their two-year range – over the next 12 months. And while good things proverbially come to those who wait, a year may seem like an eternity to investors – most of whom lack the patience to stay around that long. Fortunately, another part of the Treasury market, waiting to launch itself into a larger trend, stands on the precipice: the shape of the yield curve.
We expect the US Treasury curve to steepen much further than it has so far. At the same time, we don't think 30-year Treasury bond yields drive the curve steeper by rising as they have year to date. Instead, we expect investors to face lower yields across the Treasury curve, led by shorter maturities. Still, just as lower yields have proved elusive over the past two years, stubbornly high levels may continue to frustrate investors over the next six months. Our economists believe tariff-related inflation will prevent the Fed from lowering rates this year – a dynamic which may keep Treasury yields in their two-year range for longer.
As we approach year-end and pass the peak of the inflation impulse, our economists expect growth data to weaken. We see that path leading to lower Treasury yields into year-end – taking the 10-year Treasury yield to 4%. Then, in 2026, we think Treasury yields fall much further as the yield curve steepening accelerates, taking yields below their captive range. The predominant driver? The Federal Reserve lowering the target range for the federal funds rate by 1.75pp by the end of 2026.
Investors remain skeptical about such a drop in the Fed's target policy rate. Indeed, market prices suggest a more modest decline. Markets imply that the Fed will lower its target policy range by 1.0pp by the end of 2026 – from 4.25-4.50% to 3.25-3.50%. In contrast, Morgan Stanley projects a range of 2.50-2.75%. If the Fed delivers the policy path we envision, we expect investors to increasingly embrace shorter-dated Treasury securities – those with maturities under five years. The easing of monetary policy beyond what investors currently expect should then shift focus to what comes next: reflation.
As investors embrace a reflationary outlook toward the end of an easing cycle, they are likely to shy away from Treasuries with longer maturities, especially as their yields decline in sympathy with lower overnight rates. In addition, running in the background, the Fed's presence in the Treasury market should continue to decline. At present, the Fed holds more duration risk in longer maturities than the private sector. As the Fed gradually exits the marketplace, we expect the private sector to assume more duration risk. And to do so, we think investors will demand more compensation in the form of yield.
In the end, we expect uncertainty to remain a constant in the lives of investors through our forecast horizon. But a much steeper US Treasury curve should help to compensate them for the inconvenience.
Equities remain resilient in the face of mixed macro data / noisy headlines. We're focused on rate of change which is improving on multiple fronts, the most important one being EPS revisions breadth. Our 12M outlook remains more constructive than the consensus view. Near-term risk is tied to rates.
We've Already Priced A Slowdown in Growth...While macro data and earnings results may look softer in the summer months as a result of continued tariff uncertainty and pay-back in demand post the pre-tariff pull forward, we believe the market has already priced this type of moderate slowdown in growth (i.e., mid-single-digit percent compression in forward EPS and a high 40s Composite ISM without a labor cycle). Recall the average S&P 500 stock has already endured a ~30% drawdown this year. See our Mid-Year Outlook for more detail on our long-standing call for a tougher 1H25/better 2H25 and our rationale for not adjusting our 6500 12-month price target even amid the volatility this spring.
...And Rate of Change on EPS Revisions Breadth Is Improving...
Risk-On Internals Signal That the Market Is Focused on Rate of Change Improvement, Not Lagging Data...Cyclicals and higher beta growth areas of the market have meaningfully outperformed since the April lows, while defensives have lagged. Further, cyclical representation in the momentum factor is on the rise. Capital Goods and Financial Services, in particular, have seen outsized increases in their weights in the momentum factor over the last 1-2 months, which could be supportive of relative performance for these groups as flows pursue price momentum. We continue to stay up the quality curve within cyclicals as elevated back-end interest rates present a relative headwind for lower quality cyclicals. The cyclical recovery screen in our outlook offers a good starting point for thinking about long stock ideas tied to this quality + cyclical theme.
… The market has generally looked through weaker than expected macro data over the last month as Exhibit 1 shows (up 0.2% on days where key macro data misses expectations), which supports the point that a moderate slowdown in macro conditions absent a labor cycle is already in the price. Thus, we think it would take a new shock that fosters this type of adverse reaction in the labor market in order to lead to material downside at the index level—not our baseline. Index-level performance also proved quite resilient during a seasonally weak period over the last several weeks, and we are now into a period of strength once again from this standpoint, which is supportive (Exhibit 2).
… same shop attempting to put both notes above, together … why it matters …
How our views on the impact of tariffs on the US and the Fed's path matter for our strategists' views on rates.
In last week's Weekly Worldview, we summarized our key convictions from the Economics mid-year outlook; this week we think through how the economic views translated into asset allocation. In general, our strategists' views align closely to ours and, in particular, the timing of their calls as we are all “following the data.”
Most important, perhaps, is the timing and pace of change in the inflation and growth data in the US after the imposition of tariffs. Markets were quite volatile in April as tariff levels were much higher than expected and the “Trump Trade” reversed. Volatility saw equity/rates correlations shift dramatically as the market rapidly tried to price a multitude of new economic policies. At the time, we took a counter-consensus call to remove all 2025 Fed cuts, even as the market priced in more than 100bps of cuts. Our view was driven by previous analysis that indicated tariffs take time to manifest in data (specifically approximately a one quarter lag for inflation and 2-3 quarter lag for growth). It is within these lags that the market is trading now.
Indeed, the pace of dollar weakness stalled in May and June as excessive Fed cut expectations had to be reversed out of market pricing. The strategists are taking the view that the dollar pause is temporary and will begin anew once the path of Fed cuts are clearer. More Fed cuts parallel a slowing US economy, which we expect to manifest later this year. As US growth converges lower towards global growth, including European growth, one would expect greater convergence in interest rates and key currency crosses. A similar logic prevails with regard to the rates outlook, where strategists call for treasury yields to be range-bound until Q4 when US economic data becomes clearer. If the data follows our expectations for lower growth and inflation passes peak by the end of the year, the strategists believe that sets the stage for US treasury yields to move lower…
… While investors look forward to an uneventful summer, it may turn out that this summer is boring for all the wrong reasons. Based on our economic models, the translation of trade disruption to the hard data is likely to last deep into the summer, most notably in August. A four month lag for peak tariff led inflation, which is what our models predict based on historical experience, would put peak PCE in July/August, which will only “print” in August/September. The wait for growth weakness could last even longer, into the end of the year. These are precisely the lags that the Fed is waiting on, and, in turn investors. Which sets up a summer not of boredom but rather anticipation and anxiety.
Media coverage of events in Los Angeles has been intense. There are economic and financial market consequences, but domestic and international investors may react differently. Domestic investors’ views will be shaped by their chosen cable news channel, and potentially by fake news on social media. International investors’ perceptions of risk will be affected by their own experiences of protest, civil unrest, militarization, and secession.
Tensions in the federal government system might lead international investors to seek a risk premium for US assets. For instance, international investors’ concerns created risks for UK assets during the Scottish independence referendum. As a reserve currency, rule of law is important to international holders of US assets; rule of law is a general, not a specific, concept. Tourism and (to a lesser extent) direct investment may be affected by the protests and the response.
China’s May data showed a sharp drop in exports to the US. This will reflect the direct impact of trade taxes, and a reaction after US firms stockpiled goods in advance of being taxed. Trade talks between China and the US continue today. China’s inflation data was somewhat softer than expected.
The NY Fed US inflation expectations survey is due, but politically polarized consumers’ expectations rarely reflect likely outcomes.
Finally, a(nother) look at the economic week ahead …
Jun 8, 2025 Yardeni: ECONOMIC WEEK AHEAD: June 9 - 13
Many of the questions the Fed has about how Trump's trade war is impacting the inflation outlook will get timely answers this week. Well, updates at least, since only President Donald Trump knows how long Trump's Tariff Turmoil (TTT) will continue disrupting the world's biggest economy.
On Friday, we learned that half of Fed's dual mandate is doing just fine. The full-employment part of the mandate is confounding the hard-landers, as evidenced by the 139,000 increase in payroll employment and 4.2% jobless rate in May. So, there's no urgent need for the Fed to hit the monetary accelerator—certainly not at next week's June 17-18 Federal Open Market Committee meeting.
The resilience of the economy should be confirmed anew by this week's economic data releases. And the extent to which Fed officials might have an inflation problem (at least in the short run) could come into clearer view. Highlights include:
(1) Inflation: expectations. The New York Fed's closely watched survey of consumer expectations (Mon) will get the week started. The May survey showed inflation expectations over the year ahead edged up to 3.6%, while three- and five-years-ahead expectations both remained near 3.0% (chart). Fed officials would probably like to see all three below 3.0%.
(2) Inflation: CPI. May's Consumer Price Index (Wed) could shed light on whether Trump's tariffs are starting to boost inflation. Since April's 2.3% y/y increase, the Cleveland Fed’s Inflation Nowcasting model has been signaling slight pickups in May (2.4%) and June (2.7%). However, gasoline prices were flat in May, and the Manheim Used Vehicle Value Index eased during the month. The big surprise could be how little Trump's tariffs are boosting inflation despite upward pressures on prices-paid and prices-received indexes in the Fed's regional business surveys (chart).
… And from the Global Wall Street inbox TO the intertubes, a few curated links …
June 8, 2025 Apollo: Rapidly Growing Treasury Supply Crowding Out Other Types of Credit Growth
Over the past 12 months, roughly half of all fixed income product coming to the market has been Treasuries, see chart below.
This is not healthy. Half of credit issued in the economy should not be going to the government.
The consequence is that investors need to allocate more and more dollars to finance the government rather than financing growth in the economy through loans to firms and consumers.
The bottom line is that if the level of government debt were significantly lower, more dollars would be available for consumers to buy new cars and new houses, and for companies to build new factories.
… From that to this, another look at SUPPLY ahead of 3s, 10s and BONDS …
June 8, 2025 at 7:00 PM UTC Bloomberg: ‘Most Unloved Bonds’ Turn Routine US Auction Into Crucial Test
Global investor pushback against long-term government debt is turning what normally would be a routine US bond auction into one of the most anticipated events on Wall Street this week.
The Treasury is set to sell $22 billion of 30-year government bonds on Thursday, part of its regularly scheduled borrowings. The results, though, will receive special attention because they will offer an instant readout on the scope of market demand at a time when investor appetite for 30-year US debt has soured.
“All the auctions will be viewed through the lens of a test of market sentiment,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “It feels like US Treasury 30 years are the most unloved bonds out there.”
Yields on long-term global debt have soared in recent weeks as concern over spiraling debt and deficits led some investors to shun the securities and prompted others to demand a higher premium for the risk of lending to governments.
US 30-year yields touched a near two-decade high of 5.15% last month, and even at 4.94% as of Friday were still more than a half-point above levels seen as recently as March.
Higher yields mean funding pressure at a time when the US is borrowing more and government spending remains rampant. The House-passed version of President Donald Trump’s tax-and-spending bill is forecast by some to add trillions to US budget deficits in the years ahead. Moody’s Ratings lowered its credit score on the US last month.
“We are in a disturbing fiscal trend,” said Fred Hoffman, a former fund manager who turned to academia about seven years ago and is now a professor of finance at Rutgers Business School.
Hoffman said he’ll monitor the results of the auction next week while he’s at his vacation home in Martha’s Vineyard. Details such as the auction “tail” — where yields settle versus the when-issued level — and the extent to which orders exceed the amount of debt for sale will provide clues about demand. Foreign participation will also be in the spotlight.
“If this auction and the next auctions continue to break down with lousy tails and horrible bid-to-cover ratios, then we have problem,” said Hoffman, who discusses debt markets and mechanics in some of his class lectures…
Lackluster demand for a May 21 auction of 20-year bonds — not an investor favorite — was enough to send yields surging that day. A similar performance for the 30-year bond, a global benchmark, would be even more worrisome.
The Treasury will also auction $58 billion of three-year notes on Tuesday and $39 billion of 10-year debt on Wednesday.
To be clear, no one is raising the possibility of a so-called failed auction, and there are backstops embedded in the process to help avoid major dislocations. A network of two dozen primary dealers is required to bid at all auctions.
The recent rise in yields may also draw in buyers. Brandywine’s McIntyre said he recently bought 30-year bonds at a yield of around 5%, a level some see as attractive.
‘Becoming Disconnected’
For many, though, the bigger picture is one of elevated long-term yields for the foreseeable future, even if the outlook for shorter-term securities improves once the Federal Reserve moves closer to cutting interest rates.
Greg Peters, co-chief investment officer at PGIM Fixed Income says it’s just safer to avoid long-dated Treasuries given they are increasingly linked to political forces rather than monetary policy.
“Look at what’s happening in the long-end rates market: It’s becoming disconnected,” said Peters, who helps oversee $862 billion of assets, in an interview with Bloomberg TV on Friday. “It’s being driven by risk premium, politics, all these other factors.”
A reading on Friday of US employment in May beat forecasts, prompting a rise in yields.
Still, swaps traders are pricing in expectations that the Fed will cut rates by about a half a percentage point in the second half of the year. Fed rate reduction wagers have waxed and waned since December, with the prospect that the Trump administration’s tariffs agenda will reignite inflation serving as the primary catalyst for when traders have adjusted wagers.
What Bloomberg Strategists Say...
Yields have retreated “as growth concerns resurfaced, but the bigger picture is that they are on a long-term upwards path as long as fiscal restraint remains a quaint notion, as it seems to be in countries around the world.”
—Simon White, macro strategist
All of this has triggered a so-called steepening of the yield curve and surge in the compensation investors demand — known as term premium — to lend money to the government for decades.
A widely-followed New York Fed measure of 10-year term premium is now at almost three-quarters of a percentage point, after being negative about a year ago. That’s helped the yield curve steepen, as measured by the gap between rates on US five- and 30-year debt.
Also in the mix is a controversial piece of the Trump-backed tax bill. The “revenge tax” provision, which would hit foreign investors in the US with a surcharge if they are domiciled in countries with “unfair” tax regimes, has stirred concern of a buyers’ strike on US debt. House Ways and Means Committee spokesman JP Freire has said the retaliatory tax wouldn’t cover portfolio interest such as on Treasuries, though questions remain.
Data on the docket this week includes measures on the pace of price gains in May, including both consumer and producer prices, as well as a gauges of inflation expectations — all of which could spark movements in the curve.
“Overall, a steeper yield curve is the most likely outcome going forward,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “If we get soft enough data and the Fed cuts, then it’s going to pull short-term yields down. But I think the long end will still be plagued with the issues around the deficit and the long term outlook for a weak dollar and regarding capital inflows.”
… To A Terminal for a view …
June 9, 2025 at 5:00 AM UTC Bloomberg: The data still don't make anything easy for the Fed Reduced risk of a recession gives little reason to cut rates.
…Data-driven Exceptionalism
There’s still no need for American investors to run for the hills. Payrolls increased again last month, with the unemployment rate unchanged. Everything is set calm. Last fall, unemployment was rising fast enough to trigger the so-called Sahm Rule, named for Bloomberg Opinion colleague Claudia Sahm, which predicts recessions from the propensity of unemployment to inch higher and then increase very sharply. It no longer seems as though we are poised for a sharp rise in joblessness:
That makes life awkward for the Federal Reserve. Data last week offered signs of a slowing US economy, but this may reflect the way attempts to front-run potential tariffs are distorting people’s decisions. Using a simple measure, the effective fed funds rate is slightly above the unemployment rate, when for 15 years after the Global Financial Crisis it had been much lower. If unemployment ticks higher, history suggests interest rates will tumble. But that hasn’t happened yet:
Markets reduced still further the chances of more rate cuts this year. Overnight index swaps fully price only one 25-basis-point cut in 2025, with a 77% chance of a second. Meanwhile, last week brought a widely predicted rate easing by the European Central Bank, coupled with somewhat hawkish communications initially interpreted to make more cuts less likely. By the end of Friday, that move had reversed, leaving the gaps between US and European short-term rates, and between implied rates for December, almost exactly where they were on Jan. 1. After five months of intense uncertainty, central banks are back where they started:
Rate differentials are of course critical to exchange rates. What implications does this have for the drama of the dollar and the purported end of US exceptionalism?
