Something for your Espresso – Higher Bond Yields Are Not a Risk-Killer
Morning from Copenhagen.
More fuel to the long-end bond selloff out overnight with rumors going that Trump will as soon as today sign an executive order to boost nuclear power production, which is yet another signal that the DOGE savings plan has been thrown in the bin, and it’s once again noteworthy to remind you that Scott Bessent, which was one of the only voices actively battling higher bond yields, has also thrown in the towel on bringing down bond yields.
That said, fixed income is catching a bid across the board this morning, likely driven by the rally in the Japanese long-end (JGBs +2%) as fiscal concerns cool slightly. Remember that most people out there have been long bonds going into all this, so my best guess would be that things are just reverting a bit, but it’s admittedly interesting to see the price action in European FI with BUXL and the likes up 0.7-0.8% in 20 minutes.
We are approaching the rumored talks between Bessent and Kato on FX and trade, likely starting today, which we covered earlier this week:
“There’s heightened attention on whether U.S. Treasury Secretary Bessent and Japanese Finance Minister Kato will hold bilateral talks on FX at the G7 later this week. Kato has publicly stated he’s “seeking an opportunity” to raise FX issues with Bessent, reiterating that they previously agreed FX should remain market-driven. On Monday night, Kato confirmed a meeting is being arranged and said he hopes to discuss “various issues including foreign exchange.”
Kyodo reported Akazawa will travel to Washington later this week for a third round of trade negotiations, likely starting Friday. While USTR Greer is expected to attend, Bessent will not—suggesting any Bessent-Kato meeting will happen separately at the G7 in Canada.”
This is likely why we are seeing USDJPY trading “cheap” relative to real rates for the first time since 2023 as markets are increasingly betting on muted intervention from the BoJ while a structural weakening of USDJPY is a probable outcome, and speculative positions in JPY has been building into ATHs lately, meaning that the systematic bullish pressure on USDJPY throughout 2022, 2023 and 2024 arising from the lucrative carry are now gone.
Chart 1a: USDJPY is trading cheap for the first time since 2023
While equities and bonds usually move in opposite directions, we may now be in a regime where both rise together. Fiscal concerns are driving bond yields higher—but with U.S. corporates sitting on record cash balances, broad equities may be less sensitive to yields than in prior cycles.
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