Markets
The ‘highest since narrative’ that recently haunted the long end of bond curves in multiple countries yesterday culminated in the US 30-y yield breaking beyond the 5.15%/5.17% 2025/2023 peak levels. The tenor reached the highest level since 2007. Markets reposition as supply disruptions of oil and other commodities/products might cause inflation to stay higher for longer, but that’s only part of the explanation. A yield decomposition learns that the latest upleg in LT (US) yields is at least as much driven by higher real yields alongside the protracted rise in inflation expectations. This suggests a broader rise in (fiscal and other) risk premia which, if lasting, might spread to other markets. Returning to the day-to-day observations, there was again no hard indication yesterday that the US and Iran are moving closer to a solution of the conflict/a workable reopening of Hormuz. US President Trump at least keeps the threat of another “Big Hit” in order to accept US priorities. In this context, Brent oil held in the $109/110 p/b area. Markets at least see these levels as too high to be ignored by most central banks. US yields added between 5.75 bps (30-y) and 9.1 bps (5-y) on a daily basis, the belly of the curve underperforming. US money markets fully embrace the idea of a 25 bps Fed rate hike by the turn of the year. German yields rose between 4.9 bps (5-y) and 2.9 bps (30-y). Market discount a June rate hike (85%) followed by two other steps by the end of the year. Most ECB policy makers avoid specific guidance on the June meeting and hold to a data-dependent approach. Still Austrian ECB member Kocher at least clarified his reaction function, citing that there will be “no alternative” to a June rate hike unless there is an improvement in the Middle East conflict by then. The rise in (real) yields might become a drag on the equity performance. US Indices yesterday eased between 0.5-1%. Risk-off and higher real yields also support the dollar. DXY is testing the 99.34 resistance (end April top). EUR/USD is at risk of falling below the 1.16 big figure.
Asian equity markets remain in risk-off modus this morning. A closely watched 20-y Japanese Bond auction attracted solid investor interest (above average bid-cover) after the recent rise in yields. The 20-y yield at some point declined almost 10 bps (compared to opening levels), but part of that move is currently already reversed. For now there is hardly any positive spill-over to the US treasury market (30-y unchanged at 5.18%). The Japan Fin Min reiterates willingness to intervene to support the yen while US Treasury Secretary Bessent reconfirmed his confidence in BoJ Governor Ueda being able to successful run policy to bring the yen in line with fundamentals. Yen gains, if any, were temporary and limited (USD/JPY 159). Later today, the eco calendar is again thin. The Fed publishes the Minutes of the April policy meeting. UK April CPI inflation, published this morning, printed softer than expected (headline 2.8%Y/Y from 3.3%; core 2.5% from 3.1%; services 3.2% from 4.5%). However output PPI was higher than expected. In a first reaction sterling holds near EUR/GBP 0.866. This afternoon BoE governor Bailey and some of his MPC members will testify before a Parliament committee. After the close, Nvidia results might be interesting to see the market reaction in a context of rising (real) yields.
News & Views
The European Commission in a package unveiled yesterday presented several measures to tackle high prices of crop nutrients as well as secure supplies with the aim of avoiding food price spikes similar to 2022 when farmers have burned through supplies bought before the Iran war erupted. That could happen as soon as the end of the year. Around a third of globally traded fertilizers transited through the now-closed Strait of Hormuz. The Commission will explore stockpiling fertilizer supplies, requiring member states to have seasonal or minimum stocks, and possibly move to joint procurement of fertilizers and their components.
New Zealand households expect inflation to quicken to 5.6% (mean) in the year ahead, the June quarterly survey by the Reserve Bank of New Zealand revealed this morning. This compares to the 5.2% of the March survey. Inflation two years ahead was seen at 4.9%, materially up from 3.4%. The central bank is targeting 1-3% over the medium term but that’s not even reachable, according to households, in five years (4%, from 3.3%). Current inflation stands at 3.1% (Q1 2026) but families are perceiving price increases to the tune of 7.5%.
