Morning from Copenhagen.

Fiscal fears in global long-end bond markets are cooling slightly this morning, as Japan’s Ministry of Finance considers aligning issuance more closely with primary dealer demand—implicitly signaling a willingness to reduce long-end supply. Naturally, this development is spilling over into European and U.S. curves, with markets betting that other governments might follow suit.

But here’s the problem: you can’t sustainably cut issuance without adjusting the spending side of the ledger. Governments can play around with auction sizes and tweak duration profiles, but unless the fiscal trajectory changes meaningfully, bond yields will keep grinding higher—especially as inflation begins to re-accelerate across high-frequency indicators. The path for bonds remains lukewarm at best.

The most likely outcome? A shift toward short-end issuance, like we’ve seen during previous periods of aggressive deficit spending (e.g., 2008, 2020). The UK is already hinting in this direction, but the room to maneuver is tight (see chart below).

Such a shift would tilt curves flatter instead of steeper. But the broader cross-asset reaction function is unlikely to change much: the USD remains weak, and equities stay choppy. Given the budget trajectory—particularly in the U.S.—we continue to prefer being short the long end.

Chart 1: Governments will likely fall back to short-end issuance