Morning from Copenhagen.

The economic calendar is more or less left in the dark (aside from some PMIs and G7 inflation prints) until we get May data in early June, meaning the current risk-on / Goldilocks environment will likely continue until something arrives to change the narrative of improving financial conditions → improving macro surprises just around the corner.

The U.S. and Japan are the only remaining large economies globally where economic surprises are still in contraction territory, implying we have plenty of room to run in both USD and JPY risk assets—if we start to see a material rebound in activity, as we’ve seen in China, the UK, and other EMs. That’s currently our base case, given the expansion of credit creation, the reopening of global trade, and increased U.S. fiscal spending.

The move higher in long-end bond yields yesterday following the Moody’s downgrade was brief, with yields fully retracing the spike—effectively ignoring Bessent’s signals that the U.S. has shelved the DOGE project, instead focusing on productivity growth to outpace rising public debt.

Markets likely need to see the actual ramifications of the downgrade. So far, we haven’t seen any major holders of Treasuries scale down their exposure, which makes it hard for long-end yields to respond. For yields to break firmly above 5%, we’d likely need to see either:

1) new fiscal spending bills without offsetting cuts, or

2) an official statement deprioritizing fiscal restraint.

Japan’s long-end bond auction overnight, however, might offer clues about broader global bond sentiment. Don’t underestimate the ripple effects of the JGB market—especially if yields are allowed to reprice freely without BoJ involvement.

We just witnessed the worst auction tail in the 20-year JGB auction since 1987. With the BoJ out of the picture, the private market simply isn’t used to absorbing this kind of duration unaided. That said, we haven’t seen spillover to other G10 curves—yet.

Chart 1a: Nasty auction in JGBs overnight