Japan stops the long-end yield rise
May 27, 2025
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–It’s all about Japan’s long end this morning. Reuters reports ‘Japan to consider trimming super-long bond issuance, sources say’. 30y JGB reached a high of 3.165% last week, but the yield has plunged, now at 2.85%. The attached chart shows Japan’s 30y, current until Friday (red) and the US 30y (blue) lagged by about 1.5 years. Patterns traced out similarly. The US high yield in the 30y has been 5.115% in Oct 2023, which is shown on the chart; that level was re-tested last week.
–US stocks have shaken off last week’s sell-off as Trump pivots on EU tariffs, with ESM5 currently +88.50 at 5905.50. News today includes Durables and Conference Board Consumer Confidence, which was last at 86, matching COVID lows. The GFC low in 2009 was 25.3. Auctions this week of 2, 5 and 7 year notes, today, Wed, Thur.
–SOFR futures strip featured new lows Friday in several near 1-yr calendars. SFRU5/U6 settled down 5.5 to a new low -77 (9587.5/9664.5) and Z5/Z6 settled at new low -54.0, -6.5 on the day (9614.5/9668.5). The inversion trend continues this morning, impacted by the long-end rally sparked by Japan and continued Fed reticence to ease, with Kashkari chiming in, saying the Fed should hold pending tariff clarity. This morning U5/U6 is -79.5 and Z5/Z6 is -57.5 (9613.5, -1.5 & 9671, +2.0).
Interesting quote by Doomberg on Brussels Signal podcast
https://www.youtube.com/watch?v=4650S8nkWk0
Don’t confuse availablity of supply with the price of that supply. Simple math: The European Union consumes 40 exajoules of hydrocarbons every year and they produce 6. So they import roughly the equivalent of the entire US natural gas production every year. And they have to pay the cost of capital for every exploration, development, intermediary, midstream, cargo owners, terminal operators – everybody involved, from where the wellhead is to where the hydrocarbons are burned – has to earn their cost of capital, and this is why, if you’re not back-integrated, you may be able to secure supply but you may not be able to do so at a price that makes your industrial capacity competitive. Which is why we’re seeing the de-industrialization of Europe, and Germany in particular, and why the war in Ukraine was so catastrophic for Germany, because it went from cheap, steady, pipeline natural gas from Russia to globally sourced expensive LNG predominantly from the US and Qatar. When you import 34 exajoules of hydrocarbons a year and only produce 6, you’re not going to be an industrial power, and no non-industrial power is a relevant military power, It just doesn’t work that way. No amount of euro printing or flashy reports from former central bankers [Draghi] is going to change that.
