while WE slept: USTs "moderately cheaper in a relatively quiet overnight session", light volumes; Wally's bullish, US/China tensions; long bond buyers strike
… Assuming that the effective tariff rate settles close to my lower tariff scenario, that underlying inflation continues to make progress to our 2 percent goal, and that the labor market remains solid, I would be supporting “good news” rate cuts later this year.
… Fits with what was noted over the weekend (HERE, DiMartino Booth) but does NOT fit with more bullish look at long bonds…
On THAT note, a quick check of the front-end pulse via 2yy …
2yy MONTHLY: support up nearer 4.10% TLINE) …
… and while we’re well within triangulating range it IS / may be worth making mental note, momentum (stochastics) are at / near overBOUGHT levels (confirmed on DAILY charts, too) and could use either some time at a price OR a drift higher to resolve … I suppose that would mean a dipORtunity just ahead …
Good morning from Russia / Ukraine peace talks ‘bout to resume …
June 2, 2025 ABC: Ukraine-Russia peace talks to resume in Istanbul after surprise drone attack
… and yet with all this good news, equity futures are lower and bond yields are higher. I guess it really all IS only and forever ‘bout China …
June 2, 2025 at 3:40 AM EDT Barrons: Futures Drop as China Says U.S. Is Undermining Trade Deal
… here is a snapshot OF USTs as of 700a:
… HEREis what this shop says be behind the price action overnight…
… WHILE YOU SLEPT USTs are moderately cheaper in a relatively quiet overnight session with desk flows pointing to better fast$ payers of 5s10s30s on the London open, as well as better fading of 5s30s and 10s30s curves led by a steepening in cash. Spreads have been relatively well supported, despite a tightening from the highs during the Tokyo session. Dollar selling has extended slightly into London hours too , with DXY -0.6%, with JPY and NOK up 0.9%, respectively. Lower volumes have contributed to choppy markets - eTrading notes volumes have been ~30% lower than the 30d average. S7P futures are showing -0.5%, DAX futures -0.7%, while Crude Oil is +3.7%. The 2s10s curve is 2bps steeper, 10s underperforming +1.25bps on the 3s10s30s fly.
… 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: Stocks lower in reaction to Trump doubling steel tariffs, Crude soars post-OPEC+ ahead of US ISM Manufacturing & Powell … USTs were relatively contained overnight, but into the European session the complex came under pressure. A move that has been relatively pronounced with USTs trimming by just under 10 ticks from overnight levels to a 110-19 base. No clear or overt driver behind this and the move occurred without a broader risk move but was more pronounced in EGBs. Focus today is on US ISM Manufacturing and then Fed Chair Powell thereafter. Note, today’s move has been relatively noteworthy in European hours thus far but the benchmark remains just above Friday’s 110-18 base.
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’ …
Looking towards China for some impact of tariffs …
2 June 2025 Barclays China: May manufacturing PMI shows some relief
Following the 90-day tariff pause, the recovery in NBS manufacturing PMI in May was widely expected, led by a pick-up in production and new export orders. However, May headline PMI, along with production, new orders, employment, was still below Q1 average, and construction PMI deteriorated.
President Trump is committed politically and ideologically to high tariffs, in our view. If the CIT’s ruling is upheld on appeal, we expect the US administration to simply reimpose economically-similar tariffs using other authority. In the meantime, economic uncertainty will increase and trade negotiations could slow.
We remain bearish on the USD. For oil, market perception of a higher probability of tariffs being revoked provides a bottom for oil prices but OPEC+ incentives to boost crude supply prevent a breakout. For equities and credit, a quick change in legal strategy that retains existing tariffs is unlikely to have a lasting market impact. That said, still light positioning could gradually rebuild near-term.
Ahead of this week’s ECB’s meeting, we continue to like positioning for steepening at the long-end of the EUR swap curve as well as tighter EGB spreads. Heading into the Korean presidential election, we like steepeners, ASW wideners and short USDKRW.
… We see the Fed as having been very comfortable with an on-hold stance even before the court ruling, and this will likely remain the case for a while at least as it lets the dust settle. In the highly unlikely outcome that tariffs are permanently off the table, inflation expectations have begun to heal, and currency and rate markets no longer price in long-term risks to price stability, the FOMC might consider exploring the idea of resuming rate cuts later this year. On the other hand, if yo-yo tariff uncertainty and the aggressive use of alternative tariff authorities push up inflation and inflation expectations, the FOMC could well find itself needing to communicate a further hawkish policy shift to defend the stability of inflation expectations and of financial markets generally. Time will tell, of course.
We note that pricing for Fed cuts this year versus 2026 is beginning to converge with our view of no cuts in 2025 and 100bp of easing next year, as SFRZ5Z6 flattening reflects.
… circling back and checking in on Oil prices which WERE supposed to decline based on higher output …
… Oil might grab some attention today after OPEC+ on Saturday announced that supply would increase for a third month in a row in July where 411,000 barrels will be added. An increase of this magnitude was flagged on the wires on Friday afternoon and there was some prospect of it being higher than this. This morning in Asia, oil futures are +2.85% higher in a relief that the output increase wasn't higher.
Geopolitics have also been in headlines over the weekend at a defence forum in Singapore (Shangri-La Dialogue) where US Defense Secretary Pete Hegseth's speech, told its Asia allies it wouldn't abandon them and also criticised China for not sending a high profile representative from its defence team. Hegseth's main strand in his speech was that US partners in Asia should boost defense spending towards 5% of GDP as the region should prepare for a potential Chinese invasion of Taiwan. Clearly that hasn’t gone down well with China and comes after Trump accused China on Friday of violating its recent agreements with the US. China have responded this morning by also accusing the US of violating the agreement. So the surprisingly positive agreement between China and the US on tariffs on May 12th now seems a more distant memory…
May was a strong month for most financial assets, as better economic data and lower US-China tariffs led investors to price out the likelihood of a global downturn. Indeed, the S&P 500 posted its biggest gain in 18 months, with a +6.3% move in total return terms, whilst credit spreads also tightened meaningfully. So generally speaking, that unwound many of the moves seen in the turmoil after Liberation Day. Nevertheless, US Treasuries had a much tougher time amidst growing fears about the fiscal situation. That followed a credit rating downgrade from Moody’s, and there was also plenty of focus on the tax bill currently moving through Congress. So that meant Treasuries lost ground, and the 30yr yield even hit an intraday peak of 5.15%, alongside a broader global selloff for long-end bonds…
… Against that backdrop, long-end bond yields moved higher, with the 30yr yield closing above 5% again on May 21. It came down again towards the end of the month, closing at 4.93%, but that was still a +25bps for the month overall. That was echoed globally as well, and Japan’s 30yr yield even moved up to its highest level since that maturity was first issued in 1999, before also falling back towards the end of the month. Likewise in Germany, their 30yr yield was up +10bps, closing at 2.98% …
…Which assets saw the biggest losses in May? US Treasuries: As concerns mounted about the US fiscal situation, Treasuries fell -1.1% in total return terms, which is the first month in 2025 where they’ve lost ground …
… Global macro traders (as well as NY Knickerbockers) contemplating whatever NEXT …
June 1, 2025 MS: Sunday Start | What's Next in Global Macro: All Eyes on US
The biannual collaborative exercise in crystal ball gazing to see what is ahead for the economy and markets is a long-standing tradition at Morgan Stanley Research. In last week’s Start, Seth Carpenter, Morgan Stanley’s chief global economist, summarized key aspects of our mid-year outlook for the global economy. We had planned to focus this week’s Start on our expectations for the markets.
A publishing researcher’s curse – one that seems to surface with uncomfortable frequency – is that soon after issuing a substantial report, something comes out of the blue to challenge a key underlying premise. The ruling by the US Court of International Trade (USCIT) on Wednesday blocking the imposition of the tariffs based on the International Emergency Economic Powers Act (IEEPA) may be the current version of the curse, since trade and tariff policy figures prominently in our outlook. Although a federal appeals court on Thursday allowed the tariffs to stay in effect while it considers the administration’s challenge to the lower court’s ruling, this development added a new twist to the policy plot.
Fortunately for us, this development does not change our views of tariffs and by extension the economy and markets. The tariff path outlined in our mid-year outlook had the US maintaining an effective rate around 13%. This was substantially higher than where we started the year but meaningfully below the effective rate if all the announced tariffs had been implemented, though with wide uncertainty bands given ongoing trade negotiations. We expected these negotiations to result in lower tariffs than those contemplated in the Liberation Day announcement and its immediate aftermath. Thus, the baseline in our mid-year outlook comprised a 10% global import tariff (excluding the US-Mexico-Canada Agreement), 30-40% tariffs on China imports, and 25% tariffs on steel, aluminum, autos, semiconductors, and pharmaceuticals. We highlighted that negotiations with various countries could toggle these levels higher/lower…
…Returning to our outlook for markets after that detour, we take comfort in the notion that despite unprecedented policy uncertainty, the global economy is still in expansion mode, albeit with slowing growth. Substantial monetary easing lies ahead, along with the benefits of deregulation, making our outlook for markets relatively constructive. We believe that US assets will remain compelling versus the rest of the world. US Treasuries, equities, and credit outperform their rest-of-the-world counterparts on our forecasts.
We expect different markets to focus on different threads in the macro storyline over the next 12 months. For government bond markets, we think that the slowing economy and Fed's rate cut expectations matter the most, which means that our Treasury yield forecasts place more emphasis on slower growth and monetary policy easing. We think that the prospect of more Fed cuts than the market is currently pricing will drive government bond yields lower, particularly starting in early 2026. For credit, especially in the US, our base case of slowing growth but no recession supports our forecast that spreads stay tight and, combined with strong credit fundamentals and technicals driven by yield-based buyers, reinforces our favorable view on credit.
In equities, our US strategists see de-escalation in US-China trade tensions lowering recession probabilities as constructive, removing the most extreme downside scenarios. In other words, we think that stocks won't revisit the lows of April in the near term, especially since the large drawdowns experienced year to date have mainly been reactions to tariff shock-and-awe. Our equity strategists view the future US policy agenda as more accommodating and expect the seven Fed cuts our economists anticipate for 2026 to support above-average valuations…
… this was followed up by same shop, thinking economically …
The effect of tariffs on inflation complicates the path for central banks.
Last week, a US court ruled that many of the so-called “reciprocal tariffs” must be removed. Very shortly after, a different court ruled that most of the tariffs could stay. This type of back and forth is not new and will likely continue. A least for now, we are keeping our assumptions about where effective tariffs end up. First, the court decisions could be reversed again, but the end point is unclear. Second, in our piece “The Call of Duties,” we had noted a likely shift from country-specific tariffs to sector-specific tariffs; these court decisions could be steps along that path. Moreover, other executive authorities could allow a path to effectively replicate the tariffs. The details will matter and the details will change … only that much is certain. For now, we maintain our outlook for tariffs as embodied in our Midyear Outlook.
The tariffs are a global phenomenon, but in the US, the tariffs are likely to boost inflation and suppress growth. Outside the US, the tariffs will mostly restrain demand from the US and weigh broadly on global trade. The differential effects on inflation imply different central bank reactions. Outside of the US, central banks that were likely to hike should be less inclined to do so. Those who were likely to cut will have extra cause…
US President Trump doubled taxes on US consumers of imported steel on Friday, and (so far) has not retreated from that tax increase. Trump reacted angrily when confronted with the Financial Times acronym “TACO”, and the implication that markets expect Trump to reverse policy rapidly. Investors may worry that Trump persists with these taxes, not because of some economic objective but instead as an emotional reaction to market perceptions of their negotiating stance.
Ukraine launched military strikes inside Russia, reportedly hitting Russia’s bombing capacity. Investors have not focused on the Russia-Ukraine war recently, but this counterattack raises two relevant issues. In the short term, it presumably lessens ceasefire prospects as Russia is put at a disadvantage. Over the longer term, it raises questions about the nature of global defense spending as this was a relatively cheap drone attack…
There's no question that President Donald Trump is stress testing the resilience of the economy with what we've been (objectively) calling Trump's Tariff Turmoil (TTT). The latest developments on Friday: Trump declared that China is violating terms agreed upon in its trade deal with the US, and he raised the tariff on aluminum and steel from 25% to 50%.
Nevertheless, the resilience of the economy should be confirmed by this week's batch of economic indicators with possibly a few exceptions …
… (5) Employment & unemployment. May's jobs report (Fri) has the greatest potential to change minds at the Fed on whether policymakers think the time is right to ease. We’re expecting a gain of between 125,000-150,000 jobs, mostly spread across leisure & hospitality, financial services, and health care as the Baby Boomers spend their vast retirement savings. Based on recent trends of weekly unemployment insurance claims, the jobless rate should stay around 4.2%. It could be a bit higher if the duration of unemployment increases slightly.
Overall, though, we expect the labor market to continue to confound the skeptics and the Fed to take its time.
… And from the Global Wall Street inbox TO the intertubes, a few curated links …
Buyers on STRIKE, apparently …
Bloomberg: Buyers’ Strike Rocks US Long Bond as DoubleLine, Pimco Stay Away
For DoubleLine Capital, there are two approaches to consider when it comes to 30-year US Treasuries: either avoid them, to the degree they can, or outright short them.
Wary of America’s swelling federal budget gap and growing debt burden, the money manager led by Jeffrey Gundlach is part of a wave of investment firms — including Pacific Investment Management Co. and TCW Group Inc. — that are steering away from the longest-dated US government bonds in favor of shorter maturities that carry less interest-rate risk but still offer a decent yield.
It’s a portfolio move that has worked well this year as a pickup in government spending has dimmed confidence in longer maturities globally, from Japan to the UK to the US, which last month lost its top grade from Moody’s Ratings, its last pristine score from a major rating firm.
The US 30-year bond has been a stark underperformer in 2025. Yields on the maturity have risen, while those on 2-, 5- and 10-year notes have fallen. This sort of divergence is rare — the last time it happened over a full year was in 2001 — underscoring the pressure on the long bond as investors demand added compensation to lend to the US government for such a long period. So bad has been the rout that speculation has even begun to swirl that the Treasury might scale back or halt auctions of its longest tenor.
“Where we can outright short it,” said Bill Campbell, a portfolio manager at DoubleLine, “we are in a steepener,” a bet that anticipates that long-dated rates will rise relative to those on shorter maturities.
“But in other strategies where it’s purely long only, we’re just basically doing a buyers’ strike and moving to invest more in that middle part of the curve,” said Campbell, whose firm oversaw about $93 billion as of March.
The Treasury has long sought stability in its debt-sale plans, which makes the growing chatter on Wall Street about shrinking the 30-year auctions so unusual.
Bob Michele, the global head of fixed income at JPMorgan Asset Management, said last week that the long bond isn’t trading now like the risk-free asset Wall Street always believed it to be, and that the possibility of a reduction or cancelation of the auctions is real.
“I don’t want to be the one to stand in front of the steamroller right now,” Michele said in a Bloomberg Television interview. “I’ll let somebody else help stabilize the long end. I’m concerned that it’s going to get worse before it gets better.”
The Treasury could hint at a move to shrink long-end auctions as soon as its August refunding, TD strategists said in a note last week.
Steady Plan A Treasury spokesperson said that demand at auctions of all bond maturities has been robust and that the government is sticking to its long-held policy of issuing debt in “a regular and predictable manner.” In an April 30 statement, the Treasury committed to keeping the size of auctions of long-dated bonds, as well as other maturities, steady “for at least the next several quarters.”
Since taking office in January, Treasury Secretary Scott Bessent has repeatedly expressed confidence that the bond market will rally under his watch and that benchmark 10-year yields in particular will come down. He’s pointed to his plan to rein in budget deficits — which has stalled so far — and bolster economic growth as key initiatives that will make the US debt load more manageable and buoy demand for Treasuries. Additional demand, he’s said, could come from an administration push to ease regulations on banks’ purchases of Treasuries.
A key test comes June 12, with the next auction of 30-year Treasuries. In Japan last month, auctions sent worrisome signals about confidence in that government’s longest maturities. An offering of 40-year Japanese debt drew the weakest demand since July, boosting pressure on officials to issue less of such securities.
In the US, concern around the potential inflationary impact of President Donald Trump’s tariffs helped trigger the long bond’s underperformance soon after he took office. Federal Reserve policymakers have said they expect the announced levies to weigh on growth and put upward pressure on inflation. More recently, the Moody’s downgrade shifted the focus back to the fiscal outlook and a tax bill in Congress that stands to boost the deficit by around $3.3 trillion over the coming 10 years, according to the Committee for a Responsible Federal Budget.
As investors fretted about the prospect of increased bond issuance to plug deficits, the 30-year yield reached 5.15% last month, approaching levels last seen in 2007. Meanwhile, the yield spread over five-year Treasuries climbed above a percentage point for the first time since 2021.
Some traders saw opportunity as long-dated Treasuries slumped. In late May, dip-buyers poured money into an exchange-traded fund that tracks that segment, and saw a pay day as yields fell from their highs.
Pimco’s Caution The fiscal picture is what spurred Pimco to advocate caution toward 30-year Treasuries at the end of last year, and it continues to be underweight long maturities such as the long bond.
It’s instead favoring the five- and 10-year area of the Treasuries curve and is also looking at non-US bonds, according to Mohit Mittal, chief investment officer for core strategies at the bond giant.
“Certainly if there is a bond-market rally, in our view it’ll be led by the five- to 10-year point,” and less by the long end, Mittal said.
Auctions last week offered some endorsement for that standpoint. Sales of two-, five- and seven-year notes all saw solid demand. Earlier last month, an offering of 30-year Treasuries drew slightly weaker-than-expected interest.
Looking ahead, investors say the long end is vulnerable should the budget deal stimulate growth and inflation heading into 2026, while also lifting a US debt load that already equals the size its economy. That ratio will likely rise to 118% in 2035, eclipsing its previous high of 106% set in 1946, the Congressional Budget Office projects.
That backdrop has some money managers looking for a fatter yield premium on the 30-year to tempt them to step in. That spread over the 10-year, for example, is around its long-term average of about a half-point.
That’s not quite wide enough for Jamie Patton, co-head of global rates at TCW, to buy the long bond. She said she’s overweight two- and five-year notes and expects the curve to steepen further.
“We wouldn’t just look at the 30-year bond and say 5%, let’s buy it,” she said. “We would look at it and say it’s actually still pretty rich versus the rest of the curve.”
Randy Forsyth speaks and we should be leanin’ in …
May 30, 2025, 12:40 pm EDT Barrons: Time to Buy TIPs. Their Yields Are Off the Charts.
The pain trade. It’s the one that goes against your brain, and your gut, in no small part because you’ve been hurt, maybe recently or perhaps way back. But that memory of the ache or humiliation of the past can blind you to the potential of the future.
Long-term Treasury bonds may be my pain trade. I came of age professionally in the 1970s during the long march upward in interest rates, culminating in 15% bond yields in 1981. That experience of ever-falling Treasury values probably shaped my investment outlook for the long haul—much as Freud believed bad toilet training could affect our lives forever…
…The best opportunity may be in Treasury inflation-protected securities, or TIPS, bonds whose principal value adjusts with consumer prices. Similar to the sage observation of Bob Bleiberg four decades ago, my Barron’s colleague Andrew Bary points out the yield on 30-year TIPS recently reached 2.7%, the highest for that TIPS maturity going back to 2010.
This stands in sharp contrast to the 2020-22 period, when the long-term TIPS yield was negative, reflecting the lowest interest rates in 5,000 years of history. Recall that trillions of securities issued by governments abroad then traded at negative nominal yields. Even ignoring that highly aberrant time period, 30-year TIPS yields were between just 0.5% and 1.5% for most of the period after the financial crisis, from 2012 to 2019.
Much of the recent increase reflects a higher term premium, which describes the extra yield investors demand for committing to a long-term maturity over a short-term one. A New York Fed model shows that the estimated term premium for the benchmark 10-year Treasury was actually negative for much of the decade from 2012-2022. There are many hypotheses for investors’ willingness to accept less return for locking in longer periods back then. The then-popular view of “secular stagnation” in the postcrisis economy implied low interest rates forever. Central banks’ buying of bonds—so-called quantitative easing—also lowered longer-term rates. For the present, however, investors at least are getting paid for that risk…
…Investors are exacting a price for the policy uncertainty coming from Washington, according to a report from Rosenberg Research that cites both tariff policy and fiscal policy. On the latter score, the U.S. will be issuing nearly $3 trillion gross in new debt (including refinancing maturing obligations) at the same time Europe and Japan will also be borrowing heavily, the report points out. As a result, the U.S. Treasury term premium has spiked 60 basis points since early April and is over 100 basis points (one percentage point) above the norm of the past decade.
Even with the rise in the 30-year Treasury to around 5%, the inflation expectations implied in that yield seems implausibly low. The so-called break-even inflation rate— equal to the difference between the nominal bond yield and the real yield on the comparable TIPS—is a low 2.3% as of this past Thursday.
Those market-based inflation expectations seem overly tied to oil prices, according to John Ryding and Conrad DeQuadros, senior economic advisers at Brean Capital. Without a future collapse of energy prices, they think inflation breakevens will remain firmly above 2% “and may be at risk of drifting to catch up with the lived experience of households and firms,” they write in a client note. If you believe the consumer price index will average more than 2.29% annually—the difference between 4.92% on the long bond and the 2.63% real yield on comparable TIPS as of Thursday—you’d want the inflation-protected security. The CPI, on which TIPS are based, rose 2.3% in the latest 12 months; the question is whether that benign pace will persist.
That said, a 5% long bond yield, compared with a 4.7% earnings yield (the inverse of the price/earnings ratio) on equities, “should be a bit of no-brainer for asset allocators,” Rosenberg opines. “Meanwhile, a 4.4% yield on three-month T-bills will serve as an attractive alternative and refuge” during the current uncertainty out of D.C. on the tariff and fiscal fronts.
Ultimately, long-term bond investors should be rewarded for their patience, the note concludes. And their pain as well.
Finally, Bessent met again with Maggie on CBS yesterday morning and I’m guessing this isn’t what she’d planned for …
ZH: "Everything Has Been Alarmist": Bessent Shuts Down CBS Over Inflation, Says US Will 'Never Default' On Debt
… On Sunday, Treasury Secretary Scott Bessent disintegrated the conventional wisdom, while raking CBS News' Margaret Brennan over the coals in response to the media's fake news hysteria…
https://x.com/Geiger_Capital/status/1929572780774768685
Federal Reserve indicator now projects (massive) GDP growth of 4.6% in current quarter.