Bond Yields Surge Again
Dovish Fed can put additional downward pressure on USD – BBH Analysis
The global bond market experienced a second consecutive day of heavy selling, a move that dragged equity indices lower, pushed gold prices to fresh record highs, and strengthened the US Dollar against most major currencies. Analysts at Brown Brothers Harriman (BBH) say these developments reflect serious concerns over fiscal profligacy in both Europe and the United States.
However, the recent surge in long-term yields – particularly in UK government bonds (gilts) – is seen by some experts as somewhat overdone, given the still-strong investor demand. Yesterday, the UK government raised £14 billion through a syndicated sale of 10-year gilts, marking the largest such sale in its history and more than ten times the initial offer size. In Japan, demand for 10-year bonds was the strongest since October 2023. Today, Germany plans to sell €5 billion worth of 10-year bonds, while tomorrow France will offer 10-, 15-, and 30-year bonds, and Japan will auction 30-year bonds.
Meanwhile, a dovish stance from the Federal Reserve could exert further downward pressure on the US Dollar and support risk assets. The US August ISM manufacturing report strengthened the case for a 25-basis-point rate cut in September. The headline index rose less than expected to 48.7 (forecast: 49.0) from 48.0 in July. Details showed the New Orders index pointing to improving demand, the Prices Paid index indicating softer inflation pressures, and the Employment index suggesting the labor market downturn is moderating.
Later today, the US July Job Openings and Labor Turnover Survey (JOLTS) will be released, with openings expected to fall to a four-month low of 7.382 million (down from 7.437 million in June). More importantly, the ratio of job openings to unemployed workers has remained largely stable, indicating a relative balance between labor supply and demand. In contrast, private non-farm payrolls data suggest labor demand may be on the verge of a sharp decline.