Rates Spark: Steeper curves amid US concerns

Long end rates remain under pressure. And the divergent narratives on the two sides of the Atlantic were underscored by the market’s reception of the scheduled government bond supply.

While the upward pressure is a more global phenomenon which also lifted EUR interest rates as the path for the Dutch pension reform was cleared, yields here initially managed to retreat from their peaks after strong demand in the 10y Bund auction.

But that recovery did not carry over into the later US session. In a market increasingly attuned to concerns about deteriorating US government creditworthiness, a weaker 20y US Treasury auction led to a spike in yields. While the 20y maturity has a tendency to be a trickier sell, the results were enough to push 30y yields beyond 5%, ending the day up by 10bp. The 10y yield rose to 4.58%. Risk assets were not able to detach themselves, with equities selling off alongside.

Amid the worries around rising US deficits a key focus of today will be the vote on the US tax bill that will likely take place early on Thursday after the bill passed the House Rules Committee. But also on the European side, any improvement in the PMI and Ifo releases today could reinforce the bearish steepening tendencies, with slight improvements expected on the back of the recent de-escalation on the tariff front. We doubt that markets will place too much weight on the flash PMIs as the trade backdrop remains volatile especially with a view to the EU.