Rates Spark: Fiscal fears everywhere

It’s never easy to predict what’s coming. But especially now. Not only is there policy uncertainty to contend with, but the policies themselves are hugely impactful. Two of the biggest ones have come in the guise of 'Liberation Day' and the 'Big Beautiful Bill'. The former has left us with an average tariff rate of 13%, and rising, as letters get sent to those on the naughty list, while the latter brings a clear tax-cutting tint to fiscal policy, and leaves the US with a large ongoing structural fiscal deficit, with supply pressure to boot. Tariff revenues help to finance the tax cuts, but likely push US inflation up towards 4% in the coming months.

While Treasury Secretary Scott Bessent has no immediate plans to push issuance pressure out to longer tenors, that does not mean that issuance pressure goes away. To begin with, it is heavily bills-focused, and we’ll feel this now that the debt ceiling has been raised (done in conjunction with the passing of the Big Beautiful Bill). The US Treasury will issue big, as they need to replenish cash balances that have been spent down in an effort to stay within the debt ceiling to date. This will also act to take reserves out of the system, tightening conditions generally. This, alongside the tariff-induced spike in inflation, could well be a problem for long rates.

Tuesday's 3yr auction was not great, but tolerably fine. Wednesday's 10yr auction will be more telling, as that's where the rising rates pressure really is. Thursday's 30yr auction arguably is even more telling, as that's where the pain point has been in the UK and Japan recently.

Long-end bonds felt particularly heavy at the start of this week with 30y Bund yields already up by 8bp this week. This is in part a spillover from Japanese 30y bond yields having risen 20bp over the same time span on the back of fiscal concerns. That is a theme of course also on the mind of many investors in German Bunds given the government's spending plans, but certainly also in US Treasuries and Gilts – the latter 30y now up by 12bp since the start of the week.

We find it difficult to find factors that would bring a halt to the strong upward momentum in 30Y global rates from a structural perspective. The fiscal concerns are broad-based, with also the US and UK worrying investors. Then we have quantitative tightening continuing in the background, adding interest rate risk to absorb for the market. More niche stories like the Dutch pension reforms are not helping either and reduce demand for longer-dated swaps and bonds.

In the more immediate term, the market is also confronted with decent supply it needs to digest in a week that is also marked by trade headlines. The environment appears to remain constructive though and the €9bn EU deal that featured on Tuesday drew solid demand. The individual tranches were heavily oversubscribed as usual for EU deals with order books of €69bn and €78bn for the 7y and 20y tranches.

For the €5bn 7y tranche the resulting cover ratio was not the highest for this maturity segment, though the order book was the highest since early 2024. The 19.5 cover for the 20y reopening tranche was the highest for a non-green EU bond in this maturity segment. The initial launch of the bond in May (with a €7bn size) had a €60bn order book. Overall, good demand for European debt, something also reflected in generally relatively tight EGB spreads over Bunds even as – or maybe even because - the latter is already sensing the looming supply pressure.

Long-end Bund reopenings are now coming up on Wednesday. US Treasuries also have their share of supply to digest with this week’s refinancing round - 10y notes on Wednesday and 30y bonds on Thursday.