Long-end yields vulnerable
July 8, 2025
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–Main feature yesterday was curve steepening and a weaker long bond. Auctions this week, with 3s today, 10s tomorrow and 30s on Thursday. Yesterday tens rose by 5.9 bps from Thursday (at the early futures settle) to 4.393% and 30s jumped 7.8 bps to 4.929%. As mentioned over the weekend, as yields go higher the cheapest-to-deliver bond for USU5 moves to a longer duration issue. On Thursday the CTD was 4.75% of Feb 2041, giving USU5 a DV01 of $125.30, but at yesterday’s close it had switched to the 4.75 of Nov 2043 giving USU5 a DV01 of $137.60. This morning USU is down 10 at 112-29. On the contract, there’s an increased risk that selling begets selling. The tariff news likely doesn’t help as it might be perceived as inflationary, and certainly Japan (slapped with a 25% tariff yesterday) had been a buyer of US debt. Japan’s long rates are also moving toward new highs, perhaps siphoning off some demand from US.
–Former NY Fed President William Dudley had an opinion piece yesterday on BBG, saying the Trump administration is doing the wrong things in its goal to get borrowing costs lower. Rather than using strongarm tactics, the admin should concentrate on getting government finances in order (that was the deal made long ago between Clinton and Greenspan). Dudley notes that [constantly] threatening the Fed’s independence might make investors fear renewed inflationary pressures.
–The system depends on confidence, not on cons. Even something like the botched handling of the Epstein (non) files is a cautionary signal. This morning’s NFIB Small Business Optimism eased just slightly to 98.6 from 98.8. NFIB says the 51 year average is 98. From the site: A substantial increase in respondents reporting excess inventories contributed the most to the decline in the index. The Uncertainty Index decreased by five points from May to 89. Nineteen percent of small business owners reported taxes as their single most important problem, up one point from May and ranking as the top problem again.
