Capital Markets: "The Dollar Bounces Back but US Efforts on Rates and the Yen are Being Challenged as Iran Presses Hard"

From Marc to Market:

After consolidating softer yesterday, the US dollar has come back bid today. It often does better when US rates are rising unlike many of the other major currencies. However, the dollar’s strength does not reflect is successes on the various fronts the Trump administration has made a stance. 

The war in the Middle East has escalated and a few ships have been attacked today in the Strait of Hormuz. October WTI is traded at its highest level since May earlier today. The long-end US yields are at new multiyear highs despite the Treasury’s plan to boost buybacks starting this week. The effort to support the yen are being rebuffed as the dollar trades above JPY160, despite high conviction that the Bank of Japan raises rates late this month. While some reports claimed Treasury Secretary Bessent told Japan’s Ministry of Finance and the central bank that its next move should be to raise rates, Japanese officials seemed to play it down, and the Minister of Finance herself cited the BOJ Act, protecting its independence.  The swaps market shows high confidence in a BOJ rate hike. It is higher than the US, which has stronger growth and higher inflation....

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"Global Bond Selloff Sends Yields to the Highest Level Since 2008"

From Bloomberg, August 31/Sept. 1: 

Global bond yields climbed back to the highest level in almost two decades as rising oil prices fueled inflation concerns and investors ramped up expectations for interest-rate hikes.

The move started on Friday after Federal Reserve Chairman Kevin Warsh doubled down on his vow to finally tame inflation, and was extended this week as energy prices rose on renewed conflicts in the Middle East.

The rate on 10-year Japanese government notes touched 3% for the first time since 1996, UK 30-year yields reached the highest since 1998 and the 10-year Treasury rate hit levels last seen January last year. The yield on a Bloomberg gauge of global sovereign bonds advanced for a fourth straight session on Monday, rising to 3.72%, the highest since mid-2008.

“Markets are pricing in a higher path for short rates in the US, but also globally,” Idanna Appio, a portfolio manager and senior research analyst at First Eagle Investments, said on Bloomberg TV. “Investors are beginning to reassess what neutral policy rates look like and there has been a gradual increase in those.”

 

Global bonds have been under pressure for months, with worries over elevated government spending in markets like Japan, the UK and the US prompting investors to seek higher compensation to own longer-maturity debt. At the same time, a surge in borrowing by US technology firms to fund artificial intelligence is potentially crowding out demand for sovereign bonds.

Meanwhile, fresh hostilities between the US and Iran have raised concerns about prolonged disruptions to energy flows through the Strait of Hormuz, sending oil prices higher. Several current and former officials have said they expect the Middle East conflict to drag on for months.

“The direction of travel is going to be higher yields from here,” said Laura Cooper, global investment strategist at Nuveen. “Term premium likely has to be higher to compensate for this confluence of risks.” 

Traders are currently pricing an almost 70% chance that the Federal Reserve hikes rates by a quarter-point at its meeting this month, an increase from the European Central Bank is fully priced in for next week, while they’re all but certain the Bank of Japan will hike later this month.

What Bloomberg Strategists say... “G-10 fixed-income traders are paying closer attention to JGBs, with Australian bonds increasingly taking their cue from Japanese debt as much as from Treasuries. The near-term backdrop is toxic: sticky inflation combined with wide fiscal deficits across the US, Japan, the UK and France.” — Mark Cranfield, Markets Live strategist

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