Sunrise Market Commentary

Markets

The (very) long end of the US yield curve rallied yesterday with the curve bull flattening. Daily changes ranged from -0.8 bps (2-yr) to -9.2 bps (30-yr). The US Treasury’s unexpected decision to increase by at least double (from $2bn per operation), the size of liquidity support buyback operations for longer-dated nominal coupon securities (10y to 20y and 20y to 30y) triggered the rally. This will apply to 7 more buyback operations from September 9 through November 4 after which the Treasury will announce more on future sizes at the next Quarterly Refunding statement. The Treasury purchases off-the-run nominal coupon securities and TIPS from primary dealers, financed by simultaneously issuing new on-the-run securities. The goal is to retire illiquid older debt and replace it with more actively traded benchmarks, improving overall market depth. While the higher volumes are clearly no game-changer, they signal that “big brother” (Treasury Secretary Bessent) is watching the long end of the curve. The end-of-July joint efforts with Japanese authorities to stem JPY-weakness were also partially inspired by this. Bessent wanted to avoid the situation where Japan accelerated selling of US Treasury holdings to fund FX interventions. The US 30-yr yield moved above 5.3% for the first time since 2007 earlier this week, driven by real yields rather than inflation expectations. The US administration is focused on interest rates as election pledges to lower mortgage rates risk backfiring at upcoming US-midterm elections. Apart from the political aspect, elevated interest rates significantly weigh on the US budget deficit. Focus now turns to next week’s Jackson Hole meeting with some expecting Kevin Warsh to team up with Scott Bessent by putting a hawkish message in the market. A credible tightening signal could help put a lid on the inflation risk premium embedded in long term bond yields. Yesterday’s FOMC Minutes failed to trigger an intraday turnaround but highlighted broader support for a rate hike than the three official dissenters. “Several” participants favored raising rates with “many” assessing that tightening would be needed if inflation didn’t decline. They highlighted that “after several years of inflation above 2%, continued elevated inflation rates could begin to affect inflation expectations and wage- and price-setting decisions”.

The Treasury announcement had consequences beyond FI markets. The dollar lost appeal with EUR/USD clearing the 1.16 technical resistance area to close at 1.1677 (highest since end May). The pair is now again in the middle of the dominant trading range in place since last summer (roughly 1.14-1.20). US stock markets managed a slight positive close while gold rallied to its best level since early June on the drop in US real yields. The next couple of days will show whether Bessent’s deterrence strategy works or not. On the surface, it doesn’t seem sufficient enough to stem recent worries.

News & Views

Australian employment unexpectedly fell by 15.8k last month, coming on the back however of a stellar June (upwardly revised to 80.2k). A 32.2k employment loss in the part-time sector was only partially compensated by a rise in full-timers (+16.3k). The employment-to-population ratio and the participation rate both fell 0.2 pps, to 63.9% and 66.9% respectively, the Australian Bureau of Statistics reported. The unemployment rate unexpectedly rose to 4.5% from 4.4%. The overall slightly weaker-than-expected labour market report comes after some hawkish signals from key central bank policymakers, including governor Bullock and assistant-governor Hauser. That contradiction is now causing some kneejerk bull steepening in the Australian yield curve with changes currently varying between -2 (30-yr) and -5.1 (3-yr) bps. The Aussie dollar barely changes. AUD/USD holds virtually steady near a two-month high around 0.711.

Hungary’s Paks nuclear plant is able to avert a full shutdown thanks to water levels on the Danube river expected to remain high enough. The water serves as the plant’s main coolant, and recent low levels had already caused it to work at just 25% of capacity. In normal times, the power plant generates nearly half of Hungary’s electricity. PM Magyar hailed the recent engineering work that has already managed to raise the water level by 10-15 centimeters. It began constructing a riverbed sill last week that should raise levels by up to 1 meter but its completion is still some time away. A short-term solution consisted of sinking two barges near Paks.