Rates Spark: US yields not for turning, so spreads widen

The US 30yr auction was strong. It came some 2.5bp through (effectively rich to secondary). The indirect bid was strong (mostly foreign). The direct bid (more domestic) too. Dealer need to support the issue in consequence was low, so all good on the auction metrics, and this is a vote of positivity on Treasuries. It's likely that a perception of value helped, as the 30yr yield rose in the hours into the auction. Still, a strong 30yr auction following a strong 10yr auction is quite a good look, especially in the wake of a really poor 3yr auction where central banks were expected to show up and lap up paper.

Despite this we're inclined to view higher yields as an ongoing risk ahead. We've had too much risk-off in recent days that has not correlated with lower yields. So there is still an implicit negative tint attached to Treasuries. That's not shaken yet, and the 10yr swap spread is re-widening too. It had hit 60bp, before collapsing back down towards 50bp yesterday on the "pause" news. But has since edged back up towards 55bp.

Directionally, there seems to be no mood to materially test lower in yield right now, despite the open door being presented by the risk-off backdrop. Our impression from here is the 10yr Treasury yield will have a tendency to head for the 4.5% area, potentially with a view to thinking about 4.75%.

The March US budget numbers are not awful, but still not great. The running deficit has widened to US$1.3tn. That compares with US$1.1tn on an adjusted basis for the same period of fiscal year 2024 (October to March). The detail showed a moderate rise in tariff revenue (only small though). Cumulative revenues are running at 3.3% above 2024, while spending is running at 9.7% above. The good news is the monthly deficit at US$160bn is lower than the US$237bn seen for the same month last year. Spending was lower by 7.1% compared with March last year. That helped to narrow the running deficit to 15% above 2024. Overall, some improvement in March, but the cumulative numbers remain troubling.

It is sinking in that the US will still impose stiff tariffs despite Trump’s announcement, and while the 90-day delay gives room for negotiations and deals, it will remain a greater time of uncertainty which by itself can have a chilling effect on economic activity. So it was no surprise that the knee-jerk increase in EUR rates as a reaction to Trump’s u-turn on tariffs faded relatively quickly.

The European Central Bank pricing is now somewhat less extreme – in that there is no longer a probability discounted in forwards of a 50bp April cut – but overall the market is still firmly looking for three cuts from the ECB this year. 2y swap rates ended only some 2bp higher. There was, however, a larger move higher in front-end Schatz yields which is a reversal of the prior safe-haven demand as the most severe market turmoil in risk assets now has an end. The Schatz yield is still trading some 19bp below swaps compared to around 15bp just before 'Liberation Day' and thus still reflects remaining market caution.

Longer rates dropped, mirroring to some degree the much larger bull flattening moves seen in US SOFR and Sterling SONIA swap curves – 30y SONIA OIS rates for instance dropped by 16bp, mostly reversing the prior day’s 20bp surge. But staying in EUR space, Bund yields ended the day little changed versus Wednesday, i.e. before Trump's announcement, though this implies Bund yields trading back above swaps. At the same time we are not back to the 5bp to 10bp above swaps area yet, also here reflecting caution. This is also confirmed by EGB spreads over Bunds still noticeably above pre-Liberation Day levels.

Whilst Dutch pension funds feel the pain from lower equity prices, the coalition party NSC is still trying to change the rules of the current reforms. In the latest proposal, each pension fund would no longer be required to obtain a vote of approval before transitioning from a defined benefits system to a defined contributions system. Instead, pension funds would have to offer the participants the possibility to opt-out from the transition of his or her assets to the new system.

This change to the amendment addresses some of the issues identified by the stakeholders in earlier consultation phases, but will likely still face strong opposition. The risk sharing characteristic of the Dutch pension fund system cannot be guaranteed if each participant gets a choice about which model to follow. Having individuals choose whether to transition their assets could lead to a self-selection bias, which would have negative outcomes to certain groups (e.g. younger participants).

Having said that, the tail risk of significant amounts of assets remaining under the old system seems to be mitigated, and thus the potential impact on swap markets should be limited. Even if the amendment makes it through parliament and the senate, we think only a small number of participants will likely actively opt-out from the transition. A vote for approval would have been much more risky, as this could have implied an entire fund, e.g. ABP with €500bn+ AUM, would be prevented from transitioning. As such, we think funds will continue to prepare for the upcoming reforms by adjusting their interest rate hedges.