Growing fiscal concerns and a weak UST 20-auction contributed to a large rise in long end treasury yields. Surge in yields weigh on US equities. UK CPI higher than expected. GBP/USD reached a 3-year high with less BOE easing priced

Concerns about rising US debt and budget deficits has contributed to further rise in US treasury yields. 30-year bonds are trading back above 5.0%. Rising yields have weighed on the S&P which is down close to 1%. Currency markets were subdued overall. The jump in oil prices in Asian trade, linked to a CNN reported that US intelligence had suggested Israel is preparing to strike Iranian nuclear facilities, has fully retraced. Brent crude is trading around US$65 per barrel.

Mike Johnson, Speaker of the US House of Representatives said he had reached an agreement to press ahead with Donald Trump’s showpiece fiscal legislation. The proposed tax cuts are raising concerns from economists about the US’s fiscal position and there are signs of anxiety in the bond markets about the country’s debt burden. Former US Treasury Secretary Mnuchin said he is more alarmed by the fiscal deficit than its trade imbalances and urged policymakers to prioritise fiscal repair.

US treasury yields which has been steadily moving higher, spiked after a weak 20-year bond auction. The US$16 billion auction tailed by more than 1bp and had a weak bid-cover ratio, despite yields being above 5.0%. It is the first auction since the Moody’s downgrade at the end of last week. The closely watched 30-year treasury yield increased 11bp and has made fresh highs for the year at 5.08%. The selloff has been led by the longer maturities with the curve steepening.

UK headline CPI increased to 3.5%, the highest level in a year, and was above consensus estimates due in part to utilities prices. Core inflation was also stronger than expected at 3.8%. Services inflation, which is closely watched by the Bank of England (BOE) as a measure of underlying price pressures increased 5.4%. The BOE expects headline inflation will peak at 3.7% in September and will be closely monitoring second-round effects.

The market pared expectations for BOE easing for this year. There is now 38bp of easing priced by December, down from 42bp ahead of the data. The data contributed to higher gilt yields, and the pound reached a three year high against the US dollar.

After falling the Asian session yesterday, the US dollar was little changed on the major cross rates overnight, despite the moves in equity and bond markets. There have been small absolute changes for the Australasian currencies as well compared with the local close yesterday. NZD/USD traded above 0.5960 but has since pulled back.

An initial rally across NZ fixed income in the local session yesterday faded quickly. 2-year swap rates dipped 5bp on the open to 3.15%, reflecting large post-RBA rally in AUD rates, that happened after the local close on Tuesday. However, rates reversed higher to close at 3.20%. The curve steepened with 10-year rates up 3bp to 4.15%.

Price action was similar in NZGBs with 10-year bond yields ending 3bp higher at 4.68%. The weekly government bond tender has been rescheduled to tomorrow given the timing of the Budget today. Australian 10-year bond futures are ~6bp higher in yield terms, since the local close yesterday, which suggests an upward bias for NZ yields on the open.

The Budget will be the main domestic focus in the day ahead. Finance Minister Willis has indicated that the Treasury will maintain previous forecasts of a small fiscal surplus by fiscal year 2029. Market attention will centre on the updated bond programme and particularly the gross issuance for 2025/26, which was forecast at NZ$40 billion at the half year update in December.

Preliminary PMIs are released this evening for European countries, which alongside Germany’s Ifo survey, will provide an update on the economic impact of US tariff announcements on activity and inflation. Advance PMIs are also released in the US along with weekly jobless claims.

This note is from BNZ Research and re-posted with permission. The original is here.