Macro/government bonds
The issue of US Federal Reserve (Fed) independence remains in play. Governor Adriana Kugler resigned, and President Trump replaced her with Stephen Miran, chair of the Council of Economic Advisors. The appointment will only increase pressure on the Fed to loosen monetary policy.
Treasury bond yields were broadly stable until spiking higher late on Friday. The trigger was the cumulative effect of a series of weaker than expected US government bond auctions, and a reduction in long positions ahead of next week’s US inflation data. ISM and PMI surveys pointed to upward pressure on costs in the services sector. Tariffs are likely to have contributed to this.
In the absence of major economic and political news in Europe, eurozone bonds took their lead from US Treasuries.
In the UK, the Bank of England voted to cut rates by 0.25% to 4% in a 5/4 split, reflecting the fact that economic data is pointing to sluggish economic growth, subdued hiring trends and moderating wage pressures (see Chart of the Week). The market pushed back the timing of the next rate cut from December to February, which saw short-dated bond yields move higher. The yield on the two-year gilt jumped by 11bps and the yield on the 10-year rose by 7bps.
We took the defensive measure of paring back duration in the US, ahead of US CPI, while maintaining yield curve steepening positions in Europe and the US.
A key data release this week will be the US CPI.
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