As highlighted by Otavio Costa, this is the environment we are in:
US 2-year yields approach multi year lows as commodities approach all time highs. The Fed is likely to cut rates to service debt. And the price to pay inflation expected to run hotter. Source: Tavi Costa, Bloomberg
Gold knows
Gold is following the Japanese 30 year, pricing in "spillover" risks... Source: TME, LSEG workspace
This is Bloomberg's measure of bond market liquidity, which compares actual yield curves to synthetic smooth yield curves for each country
The more kinks you have in the yield curve, the higher this index and the worse is liquidity. UK off the charts, France rising rapidly... Source: Robin Brooks
The UK faces the doom loop of rising borrowing costs, growing deficits and a government facing a lot of bad choices to raise revenues
Yields on 30-year gilts have reached their highest levels since 1998. Source: Lisa Abramowicz @lisaabramowicz1, Bloomberg
20-year US Treasuries are down ~38% since 2020, the worst drawdown in over a century
What was once seen as the world’s “safest” asset has instead delivered stock-like volatility. Deficits, inflation, and weak demand are forcing long yields higher. Source: stockmarket.news on X
Credit spreads have rarely been this tight.
So why are investors in corporate bonds undeterred despite the significant tightening in risk spreads (chart below)? Two reasons: 1) Higher yields ("risk free" component + spreads 2) More and more investors see corporate bonds as less risky than sovereign bonds Source chart: Bloomberg
France has done nothing to stabilize its fiscal deficit & debt/GDP.
It already has the highest tax burden in Europe. These higher taxes would throttle growth potential even more. With its political paralysis it won’t cut spending neither. Next confidence vote is coming. And OAT spreads seem to start reflecting that. Source: Michel A.Arouet, INSEE
Prime Minister Bayrou is calling for a confidence vote, risking another collapse of the French government.
OAT-Bund spread keeps widening Source: Blokland Research
