Global bond yields paused after several tenors in multiple markets hit multi-year highs earlier in the week, helped by measured remarks from Fed’s Waller and a slower rise in oil, with Brent closing at $95.5/b. Waller said he could back holding rates in September if August inflation confirms disinflation, but flagged next Friday’s CPI as pivotal and left open a hike if the data run hot. US Treasury yields ended lower by 3.3 bps on the 2-year and 1 bp on the 30-year, while the services ISM came in at 55.1 with new orders at 60.9 and prices paid at 72.6; the employment component stayed in contraction at 47.8. German yields fell 4 bps to 2.2 bps, US equities rose with the S&P 500 up 1.06%, and the dollar softened as EUR/USD finished above 1.16. The yen strengthened on expectations of faster BoJ tightening, taking USD/JPY to 155.8, while EUR/GBP slipped to just under 0.86.
Asia followed Wall Street higher, with several indices up 1%+, as Japanese yields eased by 1.4 bps on the 2-year and 10.6 bps on the 30-year; USD/JPY edged to 156.3 and EUR/USD to 1.163. Attention turns to US payrolls, with consensus at 55k jobs, unemployment at 4.1%, and wages seen at 0.1% M/M and 3.1% Y/Y, before next week’s CPI. Bloomberg also reported that the MNB may reset its inflation target on 22 September to 2.5% from 3% with a +/-1 ppt band, with inflation at 1.2%, swap rates down 12 bps on the 2-year and 22 bps on the 10-year, and EUR/HUF below 362; a later move could align with the ECB’s 2%. In the UK, BoE chief economist Pill warned that pressure to fund large deficits threatens policy independence, as gilt yields sit at multi-decade highs.
Fixed-Income Market Volatility And Trading Strategies
We recommend that derivative traders position themselves for increased volatility in the fixed-income market over the coming weeks. While global bond yields have briefly paused their upward climb, any surprise in the upcoming US CPI release could quickly resume the bearish trend for bonds. To hedge against this risk, we suggest looking at short positions on US Treasury futures or buying protective put options on long-duration bonds.
Opportunities In Currency And European Interest Rate Swaps
In the currency space, we advise traders to watch the Japanese yen closely as it tests key support levels near 155. Recent hawkish remarks from Bank of Japan officials suggest that the unwinding of yen-funded carry trades is far from over. This shift is already reflected in recent market data, with the yen clawing back some ground as speculative short positions are squeezed.
Additionally, we see a tactical opportunity in the European interest rate swap market, specifically concerning the Hungarian forint. The Hungarian Central Bank’s potential shift of its inflation target to 2.5% at its upcoming late-September meeting suggests a structural shift is underway. We suggest using receiver swaps to capture further declines in Hungarian yields as the local market aligns with this new inflation target framework.
