While global equity indices are at or close to all-time highs, DB's Peter Sidorov writes that we’re seeing more challenging August crosswinds playing out in bond markets. Expectations for an imminent Fed rate hike have been pulled back, but this has been accompanied by a significant US curve steepening, with the backdrop of higher oil prices, elevated fiscal deficits, and demand for capital from the AI investment boom putting upward pressure on yields. The resulting long-end sell-off has also been a global affair, with 10yr OAT yields ending last week at their highest level since 2009 and the 30yr bund yields reaching a post-2011 high of 3.73% (see the full weekly recap at the end).
Bond markets could face further tests this week, with events including the flash August PMIs (Friday), minutes of the July FOMC meeting (Wednesday), as well as China’s monthly activity data a little later this morning. Meanwhile, this week’s 20yr Treasury auction (Wednesday) may become the most expensive Treasury bond issuance in the past 25 years – the current post-2001 high is a 5.245% yield at a 20yr auction in October 2023 and 20yr yields were 5.26% as of Friday.
That Fed pricing will be in focus with the minutes of the July FOMC meeting due on Wednesday. Given Chair Warsh has stepped back from offering policy guidance, the minutes may shed extra light on how the Fed is weighing inflation risks as well as their urgency to act should those risks remain elevated (narrator: "they won't"). Chair Warsh described the July discussion as a “good family fight” following the meeting, which saw three dissents in favor of a 25bps hike. While the minutes will be slightly stale after last week’s relatively tame CPI and PPI data, the +
