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Stresses are hitting DM government bonds. In the US, the calm was shattered when it was reported that Trump has removed Fed Governor Cook (although this decision is being challenged), raising further questions about Fed independence. On its own, this speeds up the dovish tilt in the Fed while long-end end rates rise to factor in greater uncertainty and inflation premium. In Europe, the French government is set to hold a confidence vote on 8 September. Risks of a Cabinet collapse has driven 10Y OAT-Bund spread back towards 80bps. Meanwhile, long-end Gilts continued to be under pressure as uncertainties loom over how Finance Minister intends to plug the GBP 20bn funding gap in the budget. Accordingly, idiosyncratic factors (beyond monetary policy) are driving yields. Within the DM space, haven demand is seen in German, Spanish and Italian govvies.
In the USD space, longer-term US yields may be hitting resistance. 30Y UST yields are above 4.90% and offer a decent pickup over 10Y yields at around 4.27%. Moreover, we also note that the 2Y/10Y segment is close to the top of its recent trading range (60bps). Even as there are lingering worries about the US’s fiscal situation, tariffs may be able to bring in around USD 400bn a year. Assuming that the revenue is not diverted into extra spending, this could perhaps assuage concerns on the fiscal front for a while, potentially leading to a flattening in the 10Y/30Y segment of the UST curve. The upshot is that the 2Y/10Y and 10Y/30Y segments of the UST curve are already steep and perhaps sufficiently account for Fed easing and fiscal strains. Some tactically flattening may be in order.
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