Update Bonds: Markets relatively quiet; some challenges to longer yields
US ten-year Treasury yields moved slightly lower (by 10 basis points) over the last weeks, towards 4.28%. German Bund yields moved in the opposite direction increasing slightly towards 2.56%. US interest rates benefitted from reduced geopolitical risks and the pressure President Donald Trump is putting on Federal Reserve Chair Jerome Powell to reduce interest rates.
The market believes that cuts could accelerate, as the Trump administration could fast-track the appointment of the next Fed Chair to achieve Trump’s campaign promise of lower interest rates. Due to this possibility, candidates (including current Fed officials) could be tempted to express the need for cuts in order to improve their profiles as candidates with Trump.
German Bunds moved higher as the German government presented its budget with a 5% fiscal deficit, and the EU Nato countries committed to re-arm Europe with 5% of GDP to be spent over the next 10 years, which will need to be financed.
Markets are moving fast based on geopolitical headlines (Middle East and Israel/Iran) as well as previous themes from the second Trump administration, but this is occurring (surprisingly) without any big disruptive moves in financial markets. Issues such as tariffs and currency deals, fiscal sustainability, US data and the Fed, could all now be coming to a head as a trade deadline looms and focus shifts back to Trump’s “Big Beautiful Bill.” There is also the matter of the US debt ceiling, which needs to be increased and important potentially market-moving data, such as US non-farm payrolls and inflation.
In general, developed markets appear to be moving away from a savings glut towards a bond glut, where many governments are already carrying higher deficits following the fiscal support given during the pandemic. And in some cases, such as the US, these countries appear committed to expanding fiscal spending further. As this extra spending needs to be financed by issuing more bonds, yields may need to rise in order to attract enough buyers. We see this as a risk, especially for the longer-end of yield curves, as the short-end remains anchored, thanks to the central banks.