Wall Street Breakfast: Bond Meltdown

Bond meltdown

The recent bond selloff is threatening hopes for a soft landing for the U.S. economy, as traders prepare for borrowing costs to remain higher for longer, while fears over the widening federal deficit continue to mount. Bonds that mature in 10 years or more have slumped 46% since peaking in March 2020, slightly below the 49% plunge seen in U.S. stocks after the dot-com bust.

Bigger picture: "The magnitude of the bond selloff has been so stunning that stocks are arguably more expensive than a month ago," said Barclays. "In the short term, we can think of one scenario where bonds rally materially - if risk assets fall sharply in the coming weeks." It noted that the Federal Reserve may not ease up on quantitative tightening and will remain a net seller of Treasurys, while the increase in bond supply due to rising deficit is also driving up the term premium.

What's next: Treasury yields pulled back from multi-year highs on Wednesday after the ADP jobs report signaled that the labor market was weakening. Markets will now closely watch tomorrow's non-farm payrolls report, as strong data would add fuel to the bond selloff. "The resilience of the U.S. economy and lack of buyers in the bond market means market swings will remain violent," said Edward Moya, senior market analyst, OANDA.

SA commentary: Michael Craig, head of asset allocation at TD Asset Management, said the easier part of inflation reduction has happened. "The last bit is going to be challenging. And the bond market's basically saying it's going to need to push the economy into some type of recession to get there," he warned. On the other hand, Investing Group Leader Lawrence Fuller believes the bond panic-selling has nothing to do with economic fundamentals. "It has everything to do with misguided rhetoric from Fed officials who assert short-term rates may need to stay higher for longer to squash inflation. Therefore, any incoming economic data that is stronger than expected fuels fears of higher for longer."

Ozempic impact

Up in smoke?

Tobacco companies may need to reset some of their strategies if U.K. Prime Minister Rishi Sunak's proposed legislation to gradually raise the legal age for cigarettes is passed. Sunak's plan would have the effect of eventually banning smoking through a progression of one-year raises in the age requirement to buy cigarettes. Bank of America said this type of restriction could spread to other European countries if implemented, because of which nicotine companies would need to have a "solid smoke-free strategy in place." Philip Morris (PM) and other companies have already expanded their smoke-free portfolios, but the U.K. development could reset those timelines. (8 comments)

Espionage fears

Belgium's intelligence agency has been monitoring Alibaba's (BABA) logistics hub at the cargo airport in Liège for nearly two years since it opened. This is because of espionage concerns on account of a data law that requires Chinese companies to share information with Chinese authorities. "China has the intent and capacity to use this data for non-commercial purposes," said the Belgian State Security Service. One of the aspects under scrutiny is software systems that collect sensitive data on supply chains and final consumers. Cainiao, Alibaba's logistics spinoff that runs the hub, has denied any wrongdoing, adding that the hub's data is stored in servers in Germany. (1 comment)

Today's Markets

In Asia, Japan +1.8%. Hong Kong +0.1%. China closed. India +0.6%.
In Europe, at midday, London +0.5%. Paris +0.1%. Frankfurt +0.1%.
Futures at 6:30, Dow -0.3%. S&P -0.2%. Nasdaq -0.1%. Crude -1.9% to $82.60. Gold +0.1% at $1,837.10. Bitcoin +0.7% to $27,728.
Ten-year Treasury Yield -1 bp to 4.72%.

Today's Economic Calendar

7:30 Challenger Job-Cut Report
8:30 Initial Jobless Claims
8:30 International Trade in Goods and Services
9:00 Fed's Mester's Speech
10:30 EIA Natural Gas Inventory
11:30 Fed's Barkin: “National Outlook”
12:00 PM Fed's Daly's Speech
12:15 PM Fed's Barr: "Cyber Risk in the Banking Sector"
4:30 PM Fed Balance Sheet

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