Bond Market Insights - Thurs, 27 Mar 2025

U.S. Treasuries still “volatile in a tight range”, phrase of the month. Front end yields pushed higher as February’s durable goods data surprised to the upside. Headline orders rose by 0.9% m/m, against expectations of a decline. Core orders were weaker, down 0.3%, but core shipments provided an offset, rising by 0.9%, suggesting some underlying strength.

Tariff tantrums continued. The U.S. announced a 25% levy on foreign-made cars and Europe prepared to respond with a reciprocal 20% tariff. Analysts estimate that such measures could shave over 1% off GDP growth in 2025 while also fuelling inflation. Stagflation?

I did enjoy Japan PM Ishiba’s response to the US Auto Tariffs, saying that he needs to think of an appropriate response”. After some consideration he pointed out that “Japan as a country is making largest investment to US, so wonder if it makes sense to apply higher auto tariffs equally to all countries, a point we have made and will continue to make to US”. Wonderfully Japanese.

FedSpeak is becoming more cautious. Governor Musalem noted that the indirect effects of tariffs could lead to persistently elevated inflation, suggesting that the Federal Reserve will need to maintain a “patient and vigilant” stance before moving forward with rate cuts. This echoed sentiments from Chicago Fed President Austan Goolsbee, reinforcing market expectations that policy easing will be limited this year.

The $70bn 5yr note sale saw weak demand and elevated dealer take-downs. Meanwhile, swap spreads narrowed further, especially at the long end, with 30-year spreads hitting six-week lows as regulatory and structural pressures persisted. 2s10s climbed above 32bps and the 5s30s to 60bps, levels not seen since early 2022. The market is becoming, once more, sceptical of near-term easing and instead focused on the risk that inflation will remain elevated. Some strategists are drawing parallels to 1973, when a supply shock-induced recession saw Treasury yields rise through the downturn, eyes on 6% in 10s.

ECB officials, including Austria’s Holzmann, remain reluctant to endorse rate cuts, suggesting policy is already in “neutral territory.” Meanwhile, softer inflation data from the UK and Australia has shifted expectations in the opposite direction. Notably, the Reserve Bank of Australia could cut rates as soon as May if upcoming CPI data confirms a weaker inflation trend.

Fed favourite, February PCE inflation, is out tonight. The core reading is expected to tick up modestly to 2.7%.  Additionally, Fed speakers will be back in force after the blackout.