Macro/government bonds
Our fixed income team provide their update of recent market events
The driver of fixed income markets last week was PPI inflation data in the US. Core PPI (ex-food and energy) rose 0.9% for July versus market expectations of 0.2%. Most of the advance in PPI was in the services sector. US Treasury yields rose in response. Market pricing saw the probability of a quarter point rate cut in September decline to 85%.
By contrast US Core CPI for July was broadly in line with expectations at +0.3%, only marginally higher than 0.2% for June. This translated into a year-on-year figure of 3.1%.
Adding to upward pressure on US bond yields was a robust US retail sales figure, which came in at 0.5% for July. The yield on the US 10-year rose by 3 basis points (bps) during the week. In fact, steeper curves have been a key theme in government bond markets in 2025 (and curve-steepening trades have been a successful strategy for the global rates desk), with the US 5-30 curve at its steepest since late 2021.
Treasury Secretary, Scott Bessent, suggested that the Federal Reserve (Fed) should be open to a 0.5% rate cut in September. This prompted push back from some Fed policy makers. Bessent also asserted that models pointed to a need for rate cuts of 1.5%. However, most market players were left scratching their heads about where these models existed.
In the thin liquidity of late summer, European markets took their cue from developments in the US and continuing concerns over an expansionary fiscal outlook. The yield on the German and UK 10-year increased by 10bps respectively.
The Reserve Bank of Australia cut rates from 3.85% to 3.60%, pointing to disinflation and further weakening in the labour market.
Geopolitics returned as a market driver, as US president Donald Trump met Russian president Vladimir Putin in Alaska to discuss Ukraine (see Emerging markets).
Positioning There were no major changes last week. We remain constructive on duration at the front end of curves and maintain yield curve steepening positions.
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