Our fixed income team provide their update of recent market events
As the price of the precious metal continues to climb, government bond yields fell in the wake of weaker US economic data and ongoing discussions about Fed independence.
Macro/government bonds
Last week, bond yields were lower across the board: the US 10-year fell by 15bps, the German 10-year by 6bps and the UK 10-year by 8bps. The trigger for this was weaker US economic data. The non-farm payroll number revealed that 22,000 net new jobs had been created in August, below the +75,000 forecast. The report was accompanied by negative revisions to previous data. The market now fully prices in a 25bps rate cut in September and up to two further 25bps cuts by the end of December.
The theme of US Federal Reserve (Fed) independence remains in play. Scott Bessent, US Treasury Secretary, published an article in the Wall Street Journal in which he called for an independent review of the Fed’s performance, and for a smaller central bank.
In Europe, with smaller yield declines, European Central Bank executive board member Isabel Schnabel argued that current monetary policy settings were mildly accommodative, diminishing market expectations of further rate cuts.
The spread of French 10-year bonds over German 10-year bonds remained elevated at 78bps on average last week.
In Japan, the leader of the Liberal Democratic Party, Shigeru Ishiba, will step down following the loss of majorities in both houses of Japan’s parliament. This led to concern that a new LDP leader could pursue a more fiscally expansionary agenda.
Positioning: We maintain tactical long duration position in the US and retain a bias for yield curve steepening positions in most markets.
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