Macro/government bonds
Our fixed income team provide their update of recent market events
We saw further yield curve steepening in the US through the week. The yield differential between the five-year and 30-year bond reached 1.2% – its highest level since June 2021 – as the US five-year fell by 6bps while the yield on the US 30-year rose 5bps.
Positive investor sentiment towards short- and medium-dated bonds reflected the recent remarks by US Federal Reserve (Fed) chair, Jay Powell, at the Jackson Hole economic symposium in August, at which he opened the door to an interest rate cut at the next meeting. Healthy bid-to-cover ratios at two-, five- and seven-year US government bond auctions were also helpful.
The focus at the Fed has shifted from inflation to the state of the labour market.
In a speech, Fed governor Chris Waller argued that labour demand might be on the edge of a sharp decline, while the inflationary impact of tariffs would likely prove temporary. Meanwhile, PCE headline inflation came in at 2.9% year-on-year for July, which was broadly in line with market expectations. Services remained the biggest contributor to price increases.
The theme of Fed independence undermined 30-year bond prices. President Trump announced the dismissal of Fed governor Lisa Cook citing allegations of mortgage fraud. Cook sued Trump, arguing that he did not have ‘cause’ to fire her. The market also reacted negatively to reports that the administration wants to exert greater influence over the selection of regional Fed presidents.
Market price action in the US set the tone for bond markets globally. In Europe, we saw the re-emergence of idiosyncratic country risk as French president, François Bayrou, called for a confidence vote on 8 September as he seeks the authority to make significant spending cuts.
The spread over German bonds briefly rose from 69bps to 82bps as the market priced in increased political volatility in France. Performance in government bond mandates continues to benefit from strategic yield curve steepening positions in the US and the eurozone.
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