LiveWire

US Treasury yields have surpassed the 4% mark across the curve including the 10 and 30 year, worrying investors of the effect of higher rates. But not only investors are worried, as demand dried up. Treasury secretary Janet Yellen said she is worried about the lack of liquidity and that the Fed's standing repo facility could help. Momentum is also building for creating a Treasury bond buyback program, in order to provide more liquidity to the Treasury market. As opposed to quantitative easing where the Fed buys bonds, here it would simply be the issuer (the Treasury) buying back some of its bonds. In the meantime, stronger-than-expected earnings are helping lift market sentiment, despites Treasury yields holding firm near 4%.   

US 10-year yields are revisiting highs from late 2018, as money markets are pricing 75 basis points by the Fed's September decision, implying two 50 bps and one 75 bps rate hike, according to interest rate swaps tied to FOMC policy outcome dates. More worrying the US 2 and 10-year yields are close to inversion as the 2-year yield is close to 3.2% and 10 year is at 3.25%.

European Central Bank Governing Council member Francois Villeroy de Galhau said the conditions are met for interest rates to be raised back above zero by the end of this year if the euro-zone economy doesn’t suffer another setback. Money markets are pricing in a 25-point increase in July and raised bets on the pace of tightening beyond that, seeing 95 basis points by year-end. German two-year bond yields hit 0.35% following Villeroy's comments and the euro jumped against the dollar.

The US economy unexpectedly contracted in the first quarter, dragged down by softer inventory growth, a persistent trade deficit, and to some extent by softer consumer spending. Gross domestic product fell at a 1.4% annualised rate (vs +1.1% expectations). Many analysts consider the print "misleading" as they state that the economy is still quite strong. But should coming economic data point to a softer growth, this could push the Fed to reconsider its monetary stance.

Sentiment is driving this market, and it's ticking up slightly after China vowed easing measures to counter the economic fallout from its lockdowns. China is expected to cut the key rate and reserve requirement ratio. Similarly, traders cut back bets the Fed will increase rates this year from 9 to 8 hikes, still expected before the year ends (for a total of 2% interest increase). Yields on the shorter end of the curve continue to fall the most. As such, long-duration assets (with cash flows well into the future, high PEs stocks etc) and crypto continued higher in the recovering market sentiment. The ECB meeting and earnings from large US banks are in focus today.