Early Morning Reid Macro Strategy

Deutsche Bank Early Morning Reid - Macro Strategy

Key Market Data (Index @ Close // Change) (S&P 500 @ 7641 // -0.87%) (STOXX Europe 600 @ 650 // -0.12%) (iTraxx Crossover @ 254 // +4) (Brent Oil^ @ 93.58 // +1.86%) (10yr Treasury^ @ 4.71 // 6 bp) (10yr Bund @ 3.26 // 0 bp) (Dollar Index^ @ 98.76 // -0.09%) (Further Fed hikes/cuts priced for 2026 @ 23 // 2 bp) (Further ECB hikes/cuts priced for 2026 @ 43 // -1 bp) ^ - Change from previous day's 4:30 GMT to 04:30 GMT

The past 24 hours saw renewed pressure in bond markets as the rally following the US Treasury's announcement on Wednesday that it would expand its buyback operations faded. That meant 10yr Treasury yields rose by +5.8bps to 4.71%. The sell-off in rates was reinforced by the continued rise in energy prices, with Brent crude (+2.36%) advancing for a fifth consecutive session to $93.78/bbl, amid continuing concerns over US-Iran tensions. The backdrop of higher yields and oil prices led the S&P 500 (-0.87%) to post its biggest decline of August so far. Market sentiment has stabilised somewhat overnight, though yields are mostly drifting higher in Asia while the US dollar is trading near three-month lows.

Yesterday’s rise in yields came despite US Treasury Secretary Bessent’s attempts to ameliorate the market situation in an interview on CNBC. Bessent said that the buybacks previously announced could be bigger than the $4bn per issue, and that Treasury had a “big toolkit” for the treasuries market. Intriguingly, he also said that the administration would be announcing an increased focus on fiscal consolidation, “probably at the end of this week, beginning of next week”, although he provided little other detail. Long-end yields did stabilise as the session went on, but 10yr yields still fully reversed Wednesday’s rally (+5.8bps after -5.7bps Wednesday), while 30yr yields (+5.7bps and -9.2bps) reversed most of theirs.

So for now investors are viewing the Treasury’s steps more as a band-aid than a structural solution to rising yields. Indeed, as we argued in our note dedicated to the 250-year anniversary of the US (see here on the DB Research Institute), while financial repression could play some role in managing the US debt burden, it needs to be combined with genuine fiscal consolidation to have a sustained impact.

Meanwhile, the stagnant situation in the Middle East also added pressure on rates yesterday, as markets digested Trump’s threat from Wednesday night that Iran would face the “most crushing economic operation ever”. In his CNBC interview yesterday, Bessent also said that oil markets were “misinterpreting” what this economic pressure means, and that he would hold a press conference on Monday to discuss the next steps. With lingering questions of whether the US could target countries economically supporting Iran, China’s Foreign Ministry spokesman said “sanctions and pressure will not help resolve the issue”. As prospects of resolution remained distant, Brent crude crossed $93/bbl to its highest level since late July. Brent is a marginal -0.32% lower this morning.

With oil prices moving higher against the uncertainty, that put renewed pressure on inflation expectations, with the US 1yr inflation swap rising +16.0bps, its largest daily move since March. 5yr inflation swaps (+6.4bps) also posted a decent gain to its highest level since June at 2.51%. In turn, expectations of Fed hikes edged higher with pricing of a September hike up from 32% to 36% and 23bps of hikes being priced by year-end (+1.6bps on the day). Staying on the Fed, St. Louis Fed President Musalem reiterated his view that inflation remained too high due to shocks and persistent demand. Musalem had supported a hike in July, although he is a non-voter this year.

Yesterday’s US data also did nothing to push back against the move higher in yields, with the Philadelphia Fed Business Outlook for August rising to its highest level since April 2021 (47.4 vs 41.4 prev., 24.8 exp.). Even more impressively, the capex expectations reading within the survey saw its highest reading since the 1970s. Meanwhile, initial jobless claims for the period ending in August 15 were a little lower than expected (206K vs 210k…