Rates Spark: Supply dynamics a global story

In the US, front-end rates have been weighed down primarily by comments from Kevin Hassett, Director of the National Economic Council, hinting that one should expect smaller job numbers given ongoing population trends. Markets seem to have interpreted this also as a warning ahead of this week’s delayed jobs data for January.

But supply concerns also featured, because over the weekend Chinese regulators warned domestic financial institutions about high US Treasury holdings. Such comments underscore ongoing concerns about the declining appetite of foreign investors to finance historically high US deficits. So while the front-end yields came down, the back-end of the curve saw yields rising.

While the election outcome in Japan did see 10y Japanese government bonds rise as investors reassessed economic prospects, the 10s30s curve there actually flattened amid easing fiscal concerns. However, the ultra-long steepening dynamic unfolding in the US and Europe highlights that this topic remains on investors’ minds elsewhere.

In contrast, the political turmoil in the UK is bringing back upward pressure on gilt yields, and we struggle to see the political risk premium coming down anytime soon. Starmer’s position as Prime Minister is under challenge, but an obvious replacement would not be straightforward either. Markets are right to price in higher rates as the Budget last year highlighted the country’s fiscal constraints. Reducing the issuance share of 30Y gilts helped ease longer-dated rates lower, but we’re already back to significant steepening in the 10s30s since the December lows.

Concurrent bond supply themes are amplifying long-end dynamics. The US Treasury is this week auctioning new 3y, 10y and 30y bonds. On top of that, the market was also digesting the news of large tech company issuance in dollars and sterling – out to the 40y maturity in US$ and out to the 100y maturity in sterling.

Also, in the eurozone, we see rates move higher in the coming year on the back of significant supply pressures. We estimate that markets will have to absorb a net supply of around €930bn in government bonds, which is the highest amount ever. Banks should continue to be the most important buyer, followed by foreign investors. More price-sensitive buyers like investment funds may, however, seek higher yields to fill the demand shortfall.