At the root of the week’s angst has been more evidence of still-brisk U.S. economic growth and sticky worldwide inflation that questions the degree of interest rate cuts ahead that have been long-assumed by markets. Jobless updates and a GDP revision top today’s diary.
And as the Federal Reserve and other central banks turn incrementally more hawkish, they’re complicating the heavy debt auction schedules for many governments over the month ahead.
This week has seen a blizzard of new Treasuries and signs of some indigestion were evident in tepid demand for near $300 billion of notes and bonds sold on Tuesday and some $44 billion of 7-year paper yesterday.
The combination of rates worries and debt sales has taken its toll. U.S. 10-year yields topped 4.75% on Wednesday for the first time in four weeks, though they have pulled back a touch from that level ahead of today’s U.S. open.
And despite a European Central Bank rate cut being a nailed-on certainty for next week, the jump back in long-term yields spread to Europe too. Euro zone benchmark German 10-year yields hit another six-month high on Thursday with above-forecast German annual inflation numbers for May cause for concern ahead of Friday’s euro-wide readout and dragging full-year ECB easing bets lower.
All of which makes an uncomfortable backdrop to what’s set to be the heaviest month of the year for net sovereign debt issuance. New government bond supply net of redemptions and central bank purchases is due to rise to $340 billion in June for the United States, euro zone and Britain, according to data from lender BNP Paribas.
The European debt world is also keeping tabs on credit rating updates for Italy, France, Greece and Ireland due tomorrow.
The latest bond market judder has spilled over to equity markets again, dragging Wall St stocks back from new highs on Wednesday and weighing on stocks across Asia earlier too.
S&P500 futures remained in the red first thing on Thursday – with implied volatility for the next month jumping back close to 15 for the first time since May 2.
What’s more that month ahead now captures a wave of electoral uncertainty – the first televised U.S. presidential debate on June 27, European Parliament elections on June 6-9, India’s election result next week, this weekend’s Mexican elections and the run-up to UK elections on July 4.
South Africa’s rand fell 1% on Thursday and the country’s benchmark equity index dropped more than 2% after early election results there showed the African National Congress on course to lose the parliamentary majority it has held for 30 years – ushering in an uncertain period of messy coalition building.
