Markets unstable while gilt and US Treasury yields rise

Bryn Jones, head of fixed income at Rathbones Asset Management, said: “The major move overnight was the rally in the yen amid speculation of further intervention following what appears to have been coordinated action by the US and Japan last week. If confirmed, this would mark the first joint yen operation in 15 years. A weaker dollar also fits with the direction of travel suggested by recent US policy rhetoric.

“Predicting what happens next remains extremely difficult. The one certainty is continued uncertainty, driven by Trump’s constant back and forth, which creates erratic behaviour from the markets. Each hint of a ceasefire has prompted a rally in rates, only for yields to sell off again when geopolitical tensions escalate and oil prices move higher.

“That volatility was clear on Friday, when both gilt and US Treasury yields rose. Gilts again showed their higher-beta characteristics, with larger moves in yields. The 30-year gilt remains close to its multi-decade high of 5.84 per cent, currently around 5.78 per cent, while the 10-year is back above five per cent. Technical indicators suggest the market is only marginally oversold, but any positive development on a ceasefire could still drive yields lower in the short term.

“Equity markets are also moving sharply. The Korean market is up 191 per cent over 12 months, but down 31 per cent from its peak. It was up 19 per cent on Friday and is now five per cent today, underlining the scale of recent volatility. While rates and stocks fly about like a double pendulum, credit spreads are trying to avoid the chaos and trundle along sideways, for now at least. That could change if a heavy wave of issuance tests demand, although Friday’s session did suggest buyers were willing to step in around recent spread highs, particularly in the hyperscaler segment.

“US Treasury yields reached their highest level since 2007 high last week, while bund yields hit their highest since 2011. Interesting that both these periods were also impacted by rising credit spreads, which makes the current backdrop worth watching closely.

“As for the Fed, forward guidance is becoming more complicated under Warsh. The last Fed meeting was already difficult for forecasters, and his proposal to reduce the number of meetings from eight to six a year could make communication even harder. At the same time, persistent inflation concerns are keeping yields elevated, while rising open interest in rates markets suggests investors are continuing to position for higher long-dated yields.”