A look at the day ahead in U.S. and global markets from Mike Dolan
The eye-watering surge in long-term U.S. government borrowing costs continues to pummel world markets everywhere as investors fear 30-year yields above 5% are bound to sow financial distress somewhere in the system.
With U.S. Congress again riven by the overnight ouster of the House speaker and Federal Reserve officials teeing up yet another interest rate hike amid persistently tight jobs market readings, bond yields are spiralling ever higher.
Renewed concerns about a government shutdown next month now follow the removal of speaker Kevin McCarthy late on Tuesday – an unprecedented ejection of a Speaker by his own party. The fading prospect of fiscal peace in Washington going into an election year and beyond also saps the chances of reining in mounting deficits, hugely inflated by surging interest costs.
That’s all on top of the ongoing rethink of the Fed’s long-term rate horizon and increasingly high-pressure economy.
And then throw in the resulting rampant dollar and the Bank of Japan’s looming battle to hold up the yen, which intensifies speculation it may sell dollar reserves and Treasuries at the margin or move quicker to tighten its own monetary policy.
Hit from all sides, the Treasury market is simply in ructions – catalysed perhaps by technical, speculative and positioning factors too.
Ten-year yields hit a whopping 4.88% early on Wednesday – an increase of 80 basis points in little over a month. But 30-year yields that briefly topped 5% today for the first time since 2007 will have set off as many alarm bells.
The long-inverted 2-to-10-year and 2-to-30-year yield curve gaps are closing fast to their lowest of the year. And implied volatility in the bond market hit its highest since May.
With exchange traded funds capturing the full gamut of Treasuries now down 4.3% for the year to date – and U.S. government debt clocking a third straight year of annual losses for the first time in over two centuries – wider credit markets have started to murmur too.
Although still relatively muted compared with the banking blowup in March, borrowing premia on U.S. corporate junk bonds are creeping higher again and have widened almost 40bp from the impressive lows set just two weeks ago.
And the Fed shows no sign of concern about the disturbance yet – repeating to fade its mantra on higher-for-longer interest rates and even the chance of one more hike.
With job openings in the wider economy rising again counter to all expectations for August, it’s easy to see why the Fed is not for turning yet. Alongside another heavy diary of Fed speakers on Wednesday, we get ADP’s September rally of private sector payrolls and service sector business surveys for the month.
The gloomy rates picture is starting to floor stocks too – with a growing feeling that dysfunction in Washington and a Fed seemingly intent on tightening until something breaks all spells a rough end to the year just as another earnings season unfolds.
The dropped more than 1% on Tuesday to its lowest since May and the tech-heavy Nasdaq plunged 1.8%.
And the selling rippled out across the world through Asia and Europe again on Wednesday – with MSCI’s all-country stock index hitting its lowest since April and S&P500 futures remain in the red.
Overseas, the dollar remains king despite suspicions of BOJ intervention at 150 yen in Tuesday’s session. Japanese officials continue to equivocal about the chances of yen buying.
The Reserve Bank of New Zealand held policy rates unchanged.
Key developments that should provide more direction to U.S. markets later on Wednesday:
* U.S. Sept private sector payrolls from ADP, U.S. service sector surveys from ISM and S&P Global, Aug factory goods orders
* U.S. Federal Reserve Board Governor Michelle Bowman, Chicago Fed President Austan Goolsbee, Kansas City Fed chief Jeffrey Schmid and St. Louis Fed Interim President Kathleen O’Neill Paese all speak
* Turkish Finance Minister Mehmet Simsek holds investor meetings in London
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