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Bond Market Insights - Thurs, 03 Aug 2023

UST curve steepened with duration pressured following a strong ADP print and the Treasury’s quarterly refunding announcement, which was larger than expected. ADP reports a 324K increase in July private payrolls, above the consensus of 190K. It has been an unreliable indicator since the new methodology last August, so is all but being ignored by most pundits. 30yr yields hit year to date highs at 4.20%, the 10yr peaked at 4.12%.

US IG issuers were busy, after a subdued Tuesday due to the downgrade announcement. 4 issuers and 15 tranches amassed $13bn. The highlights were Columbia Pipelines, who placed a $5.6bn deal, and Wells Fargo with $5bn.

An old mate, Mike Ashton - the Inflation Guy, worries not about the US reneging on its bonds but more about the growing federal deficits, an increasing trend of onshoring production to the US and the Federal Reserve continuing to reduce its balance sheet, which are all interrelated. The government must get money from either domestic or foreign savers when it spends more than it gets paid. The trade deficit is one way that foreign savers acquire US dollars to invest. On the domestic side, savings come mainly from individuals and the Federal Reserve.

The federal deficit is now growing larger again, creating a divergence between the trade deficit and the Fed's balance sheet. With onshoring gathering momentum, the trade deficit may decrease, leading to fewer dollars available for foreign investors. This means domestic savers will need to buy more Treasuries to make up the difference, which requires higher interest rates. A developing spiral?

Today is BoE day and consensus expects a 25bp hike, but a 50bp hike is possible. The Eurozone publishes PPI and the US Jobless claims and Services ISM. The lone speaker from the Fed is Barkin, who will be reiterating data dependency.


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