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Bond Market Insights - Wed, 02 Aug 2023

USTs struggled again, following European bond markets down at the open. 10yr yields peaked at 4.055% with 2s10s steepening to -85bps. Fingers pointed to the Treasury’s larger-than-expected borrowing announcement of about $1trn this quarter followed by $852b in Q3. There was a brief bounce on the 10am data which included JOLTS job openings which fell to 9582k, the lowest level since April 2021. ADP Employment data is tonight and consensus is for a 190k gain, but this data series did give a false heads up for payrolls last month.

Fitch downgraded the US country rating to AA+, bringing it in line with S&P, who downgraded the US in 2011. Moody’s remains at AAA. The downgrade was not because the US treasury is unable to service its debt. The downgrade was because of an “expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions”.

The US still holds ‘special status’ as the world’s largest reserve currency, with average holding at 60% of total FX reserves (IMF data). Perhaps the growth in trade contracted in non-USD currencies has prompted Fitch to make a pre-emptive move, but who you gonna call when it all goes sour.

The BoJ's policy tweak overshadowed all other considerations. The average projected inflation rate for the next three years is near the 2% price stability target and if the BoJ determines that the rise in prices is being accompanied by wage growth, it could begin to revise its policy stance in earnest. Nominal cash earnings for Japan's workers rose 2.5% in May, blowing past analysts' expectation +1.2%. The next release is due on 8th August. definitely worth watching.


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