Yields Ease on Japanese Bond Reports

INTEREST RATE MARKET FUTURES

Futures are higher across the curve, supported by easing trade tensions and reports that Japanese authorities are considering adjusting their debt plan after a sell-off that drove bond yields to their highest levels in decades. The potential for lower issuance of Japanese bonds supported US Treasurys, as the lower supply of Japanese bonds could bring more investors over to the US bond market.

Despite yields easing, worries over a gaping budget deficit and overall trade uncertainty remain in the Treasury market as investors are demanding a higher premium for holding onto longer-term bonds. Most of the selling in the bond market has been at the long end of the curve, driven by concerns of long-term inflation resulting from President Trump’s tariffs and tax cuts.

The Treasury Department is expected to need to increase most of its longer-dated debt auction sizes later this year or next year to finance the government’s growing debt problem. US public debt is around 100% of gross domestic product and projected to rise to 134% over the next decade. Investors are worried that an increase in bond issuance will outpace demand, as recent Treasury auctions have been met with tepid demand, although foreign demand remains stable.

Markets are pricing 50 bps of rate cuts from the Fed by year-end, with the first cut coming at September’s meeting. Thursday’s lower-than-expected weekly initial jobless claims figures show a resilient labor market, giving the Fed more room to hold rates steady while it waits to see how tariffs will impact inflation.

Investors are now looking ahead to auctions of two-, five-, and seven-year debt this week, as well as the release of the Federal Reserve meeting minutes, economic growth, and April PCE inflation figures, which are the Fed’s preferred inflation gauge.

The 10-year Treasury yield is below 4.5%, and the 30-year yield is just under 5%. The spread between the two- and 10-year yields decreased to 49 bps from 55 bps Friday.

STOCK INDEX FUTURES

Index futures are sharply higher after President Trump announced on Sunday that the US would delay imposing 50% tariffs on the EU from June 1^st to July 9^th to allow time for trade negotiations. Following the announcement, the EU said it would speed up tariff talks between the US, easing trade war concerns.

Durable goods orders fell less than expected, with a month-over-month change of -6.3% for the month of April, where economists were expecting a fall of -7.6%. Core durable goods orders increased +0.2% over expectations of a decline of -0.1%.

New home sales for the month of April were higher than expected, with 743,000 sales vs. an expected 694,000. The figure is also a step up over March’s reading of 670,000. Investors will be paying close attention to the construction industry for signs of economic weakness and implications for the labor market. A slowdown in the construction industry could have major implications for the labor market in the future, as 11% of the male workforce in the US is employed in the construction industry.

CURRENCY FUTURES

The US dollar index is higher amid the US-EU trade developments.

Euro futures edged down amid the US-EU trade news, and as French CPI inflation cooled to 0.6% in May, down from 0.9% in April, as falling services and energy costs kept overall inflation lower. The lower inflation adds to expectations that the European Central Bank will cut rates at its meeting next week. Eurozone economic sentiment saw a slight recovery in May, rising to 94.8 from 93.8 in April. French GDP and German unemployment figures will be published overnight.

British pound futures are higher, driven by improved market sentiment and strong retail sales data published Friday. UK retail sales rose 1.2% in April, the fourth consecutive monthly increase, showing consumer resilience despite tax hikes and trade tensions. Inflation in the region remains elevated at 3.5%, higher than expectations for the Bank of England. Markets are now seeing a 50% chance for a rate cut by the BoE by August.

Japanese yen futures are lower following reports that Japanese authorities may intervene in the bond market by reducing bond issuance after a recent sell-off drove yields to record highs. Japan’s finance ministry sent a questionnaire to market participants Monday evening asking for their views on issuance and the current market situation. Investors took the move as a sign that authorities are seeking to stabilize the bond market.

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