Trade confusion and long yield relief

What matters in U.S. and global markets today

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

Markets were left nonplussed by increasingly erratic U.S. tariff announcements over the weekend, although nerves have been soothed slightly by the reduction of tensions at the long-end of several major government bond markets.

I'll get into all of this below and then explore why the U.S. government, issuing ever more debt, should be wary about becoming overly reliant on the kindness of private investors.

I'd love to hear from you, so please reach out to me at mike.dolan@thomsonreuters.com. 

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After a torrid week for long-dated sovereign debt, some calm was restored on Tuesday by indications Japan would consider trimming sales of super-long bonds. Policymakers in Tokyo are seeking to reduce market concerns about the country's worsening government finances.

Yields on 30-year Japanese government bonds fell by up to 20 basis points to 2.83% after the report, the lowest since May 8. The benchmark 10-year yield dropped 5 points to 1.455%. The dollar rose 0.5% against the yen to 143.9.

Also helping ease pressure on the long end of bond markets was a Financial Times interview with Britain's debt management chief Jessica Pulay, who emphasized that the UK had shifted to shorter-term borrowing this year. Pulay noted that demand for long bonds from pension funds has waned due to demographics and pension scheme changes. 

UK 30-year gilt yields fell back almost 20 bps from last week's peaks.

U.S. 30-year yields declined in sympathy, retreating below 5% for the first time since last Tuesday.

As traders returned following the long Memorial Day weekend, U.S. stock futures were up smartly, largely because President Trump has backed off from Friday's threat to impose 50% tariffs on EU imports next month. He instead restored a July 9 deadline to allow for talks between Washington and the 27-nation bloc to produce a deal.

European stocks were higher too on Tuesday, with the euro slipping back after two days of gains on the confusing policy twists. 

The back and forth on tariffs will likely keep trading on edge, but markets will likely have to get used to this policy volatility in the weeks and months ahead.

Federal Reserve Bank of Minneapolis President Neel Kashkari on Tuesday called for keeping U.S. interest rates steady until there is more clarity on how higher tariffs are affecting inflation. He warned against simply looking through the impact of a potential supply side shock.

"It may take months or years for negotiations to fully conclude, and there could be tit-for-tat tariff increases as trading partners respond to one other," he said.

This week's release of the April 'personal consumption expenditures' update - the Fed's favored inflation gauge - will be monitored closely.

U.S. markets return amid a sweep of economic updates, including durable goods orders for April and consumer confidence readings for May.

Meanwhile, tech investors are turning to the big earnings event of the week. Shares of semiconductor industry bellwether Nvidia gained 2.8% as the company is slated to report quarterly earnings after markets close on Wednesday.

Elsewhere, Trump Media & Technology Group advanced 10% after a media report said Trump's social media firm planned to raise about $3 billion to spend on cryptocurrencies such as bitcoin.

Now to today's deep dive, where I explore how declining investor appetite for long-duration debt could stress government funding markets.