Rates Spark: Stability From The Fed As A Counter To Volatility Risks

2025-05-07 04:30:00 ET

Summary

• Risk assets of late appear to be in better shape (despite prior scares). But that can change quickly. The coming months will be crucial in this respect, with the clearest risk coming from any material scent of recession ahead.
• Part of the Fed's job on Wednesday will be to cause as little consternation as possible. The relative calming of late makes the Fed's job that bit easier this time around. There will be more testing meetings ahead though, where growth versus inflation calls will have to be made.
• Noticeable volatility was seen around the vote of the next German Chancellor. While in outright Bund yields the initial impact of the incoming government’s pledge for defence and investment spending has been largely faded, the sensitivity to the political developments shows that markets still put a lot of hope into the spending plans.

By Padhraic Garvey, CFA , and Benjamin Schroeder

US Treasuries are prone to big moves, but tracking along quielty for now

We saw a decent US 10yr auction. It (effectively) came through secondary levels by over a basis point. The indirect bid (external official sector driven) at 71.2% was down from last time but still decent. Direct bidders (domestic real money driven) was up to almost 20%. Overall, there was less need for dealers to take up the slack, and the consequential cover at 2.6 times was decent. The reaction saw yields drift down by a few basis points in the aftermath, and that soft tone continued into the US close. Overall, the auction confirms there are buyers of US Treasuries. Flows data last week showed net selling, so at least this is swinging in the other, more positive direction....

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