| Close | Previous Close | Change | |
|---|---|---|---|
| Australian 3-year bond (%) | 3.288 | 3.374 | -0.086 |
| Australian 10-year bond (%) | 4.367 | 4.301 | 0.066 |
| Australian 30-year bond (%) | 5.111 | 4.993 | 0.118 |
| United States 2-year bond (%) | 3.954 | 3.847 | 0.107 |
| United States 10-year bond (%) | 4.493 | 4.392 | 0.101 |
| United States 30-year bond (%) | 4.875 | 4.848 | 0.027 |
LOCAL BOND MARKETS
Australia’s 10-year government bond yield rose toward 4.4% as investors assessed remarks from Reserve Bank of Australia Governor Michele Bullock. In a speech in Melbourne, Bullock stated that it is “too early” to determine how U.S. President Trump’s trade war will impact interest rates in the coming months, while downplaying expectations of a double rate cut in May. She added that the market turmoil caused by the trade conflict is not as severe as the 2008 global financial crisis.
Still, markets remain fully priced for a 25bps rate cut in May, with some even leaning toward a half-point move. This dovish tilt in market pricing was mainly due to the intensifying US-China trade war, which poses risks to Australia’s export-driven economy, particularly given China’s role as its largest trading partner. On the economic front, Australia’s consumer inflation expectations rose to 4.2% in April from 3.6% in March, reflecting concerns that the escalating trade tensions could boost inflation rate.
Despite Trump’s backdown, bond markets still bet the RBA will cut the cash rate five times this year, taking the cash rate to 2.85% by December from 4.1%. Traders ascribe a one-in-three chance of a 0.5 percentage point cut in May. NAB said it now expected the RBA would deliver a 0.5 percentage point rate cut in May and slash the cash rate to 2.6% by February 2026. In contrast, Deutsche Bank on Thursday reversed its call for a 0.5 percentage point rate cut in May, and now expects a 0.25 percentage point cut instead.
US BOND MARKETS
What on earth is going on in the bond markets and we should all be worried. The yield on 10-year Treasuries — which are a benchmark for the cost of everything from corporate bonds to mortgages — rose as much as 16 basis points to nearly 4.6% Friday, a more than half-percentage point increase since the end of last week, before paring the jump. The 30-year rate climbed as much as 12 basis points to nearly 5%. As for the short-end, the 2-year rose too, up 8 bps to 3.96%. The worst week since 2019. And consumer confidence is crumbling.
The selloff in Treasuries intensified as investors continued to pull back from US assets, sending longer-dated yields toward the biggest weekly surge since the 1980s. The rout, which was set off by the US trade war that’s shaken global markets, is threatening to deal another hit to the economy by pushing up borrowing costs more broadly. It is also casting doubt on Treasuries’ status as the world’s safe haven as they slid along with the stock market this week, sending investors into other assets like the Swiss franc, gold and the Japanese yen.
The five-day climb has surpassed those seen during the chaos of the 2008 financial crisis and be the most since the early 1980s, when the high level of interest rates meant the impact was far less jarring. President Donald Trump’s erratic tariff moves have led to wild swings in US government debt over the past week by not only undermining confidence in the economy, but also the direction of US policy and America’s standing in the world. That’s eroding appetite for US assets and has spurred speculation that crucial overseas owners — like China — may retaliate by pulling back from Treasuries. Talk has also swirled about blowups in hedge fund trades and an exodus of foreign investors.
The drop in Treasury prices was accompanied by a sharp slide in the dollar — which tumbled this week by the most since 2022 — in an indication that overseas investors are pulling back from the US. The Dollar Spot Index was down nearly 1% on Friday, bringing the weekly decline to over 2% and helping to support foreign currencies across emerging and developed markets. Investors also flocked to Europe in debt markets to escape the broader turmoil, leaving German yields largely unchanged in the week while the rate US 10-year debt surged more than 50 basis points. That’s the biggest underperformance of Treasuries compared to bunds since at least 1989, according to available data.
Notwithstanding the relatively well received 10-year and 30-year auctions this week, today is starting to look like a buyer’s strike in the Treasury market and unloading of risk going into the weekend. Liquidity has been very challenging – 10-year liquidity is at the most stressed levels since the regional bank failures in 2023.
After a week of wild swings in the bond market, China’s holdings of Treasuries are increasingly under scrutiny from analysts around the world. Some have gone as far as suggesting — without hard evidence — that sales by Beijing may have helped fuel the biggest surge in 30-year yields since the pandemic and subsequent volatility. Others debate whether China might turn to dumping US debt in the future as a response to the steepest American tariffs in a century.
Has the US treasury market become uninvestible? Let’s go back to Friday and Jerome Powell’s comments. He stated that if inflation emerged, he’d focus on inflation over weak growth. And that’s what started the selling. And much of the selling has come out of Europe. EU long dated yields have hardly moved, not that we are saying that China has not had an impact. China owns a lot of securities through Luxembourg entities. And we suspect that China is likely prepared to punish itself to punish the US. The yield gap between US Treasuries and Bunds is rising, because the US treasury market is breaking down.
Figure 1: Stress in the US Treasury Market
So the US government budget deficit is running at 9% of GDP, the same level it was running at the GFC, yet we currently don’t have a crisis. Point is . . . radical policy is required. And if tariffs are the wrong policy, then give me another radical policy. Sounds like a situation of persisting volatility.
The Chinese, which retaliated with a 125% tariff, may well say the US tariff policy is a joke, but Americans aren’t laughing at the moment. The University of Michigan Consumer Survey released on Friday was dire. US consumer sentiment fell to 50.8, the second-weakest reading on record, due to growing tariff concerns and soaring inflation expectations. Consumers expect prices to rise at an annual rate of 4.4% over the next five to 10 years, the highest since 1991, and 6.7% in the coming year, the highest since 1981. The UMich survey, coming out of the democratic stronghold of Chicago, is notoriously pro democrat. But apparently in this report, the real wake up call is that Republican voters are becoming increasingly gloomy. Once consumer sentiment drops off a cliff, it is very hard to turn it around. And clearly the US consumer is nervous. Those inflation expectations are not realistic, but expectations matter.
Figure 2: The US Consumer is Nervous. Very Nervous
See Figure 3 below and tell me we are not in extraordinary times. Introduced by Federal Reserve economists Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo in their paper The Economic Effects of Trade Policy Uncertainty, the Trade Policy Uncertainty Index (TPU) is constructed by counting the frequency of joint occurrences of “trade policy” and “uncertainty” terms across major newspapers. A reading of 100 indicates that articles discussing “trade policy” and “uncertainty” account for 1% of the total news articles.
The trend in the chart shows that the TPU Index spikes initially in the 1970s following the Nixon “shock” to U.S. trade policy in 1971 and the imposition of oil import tariffs by President Ford in 1975. There are additional increases in TPU resulting from trade tensions with Japan in the 1980s and around the NAFTA negotiations in the mid-1990s. TPU reaches unprecedented levels beginning after the 2016 and 2024 U.S. Presidential Elections and spikes several times in response to heightened tensions between the U.S. and its trading partners, notably China, Mexico, and Canada. And right now . . . . off the charts!!! We are on a very dangerous path – the US has committed to a trade war with China. And where are their allies – not Canada and probably not the EU.
Figure 3: World Trade Policy Uncertainty Index – Ouch!!!
