Markets Daily: Diverging Yields

A growing chorus of fund managers are warning that Treasury market repricing may have further to go, despite the Fed's pivot to interest-rat

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Markets Snapshot S&P 500 Futures 5,973.25 +0.32% US 10-Year Treasury Yield 4.681% -0.004 Stoxx Europe 600 Index 516.94 +0.44% Euro 1.03 -0.20% Hang Seng Index 19,279.84 -0.86% Market data as of 05:58 am EST. View or Create your Watchlist Market data may be delayed depending on provider agreements.

Five things you need to know

A growing chorus of fund managers are warning that Treasury market repricing may have further to go, despite the Fed's pivot to interest-rate cuts. Options indicate the potential for a spike in 10-year yields to 5% from 4.7% now. Stock futures and bonds gain after a selloff yesterday. Oil climbed above $75 a barrel for the first time in almost three months.  Exxon Mobil earnings took a hit last quarter from lower oil prices and narrowing refining margins. Shell's stock is falling after reporting lower natural gas volumes and weaker gas-trading profits. German factory orders dropped the most in three months and French consumer confidence unexpectedly fell, further evidence that Europe's biggest economies are struggling to grow. Tencent repurchased the most shares in almost two decades after a selloff sparked by the tech company's addition to a US blacklist for alleged links to the Chinese military.

Debt market divergence

The contrast in signals from the bond markets of the world's two largest economies couldn't be clearer. On one hand, US Treasury yields are climbing higher by the day, powered by seemingly unstoppable economic growth. On the other, traders have rarely been so pessimistic about China, forcing yields to fresh record lows on fears the No. 2 economy is heading for a deflationary spiral, as Joanne Wong and Finbarr Flynn report in today's Big Take.    The divergence is playing out in all corners of the two debt markets. Tuesday's 10-year Treasury auction drew the highest yield since 2007, investors are now targeting 5% yields for the benchmark and swap traders have pushed bets on the first quarter-point interest rate cut this year out to July from June.  (For an explainer on why short- and long-term rates in the US are going in different directions, check out our QuickTake.) China's dour outlook, meanwhile, has triggered a stampede into bonds. The 10-year securities now yield an unprecedented 3 percentage points less than comparable US debt. The yields are far below levels reached during the Covid pandemic and 2008 global financial crisis, underscoring that Japanification is now a real risk. BlackRock's Navin Saigal is among those who see bond yields reflecting a "desynchronization" of the US and Chinese economies. Juicy US yields are also presenting an "incredible" opportunity, he says. Citigroup's wealth division also says US debt would be worth buying at a 5% yield. The move higher in US yields, though, is threatening to undermine the long-running rally in stocks. The move echoes the ones seen in 2022 and 2023, which were accompanied by sharp drops in global equities. Yet this time, the rally has only taken a gentle breather, leaving scope for losses should yields keep surging. "The yield backup is of course a little painful," Saigal, BlackRock's head of fundamental fixed income, Asia Pacific, said on Bloomberg Television. "But in some ways it could also be viewed as a gift — there's still a lot of cash sitting on the sidelines and now this cash can now be put to work." —Ruth Carson

On the move

Days before his inauguration, Donald Trump is moving stock markets with comments on everything from defense to renewable energy, and even Greenland. Wind-power stocks are slumping after Trump said he wants no wind farms built during his second term, threatening billions of dollars in planned projects. In Denmark, turbine maker Vestas and power generator Orsted are both down about 5%, while Germany's Siemens Energy is falling about 3.7%. Defense stocks are rising after Trump said NATO nations should spend 5% of economic output on defense, more than double the current target. Norwegian missile maker Kongsberg gained as much as 4.1%, Sweden's Saab was up 5% and Germany's Rheinmetall rose 5.3%. Energy Transition Minerals, a small Australian mining company with a project in Greenland, surged 52% after Trump reiterated his interest in acquiring the island.— Kit Rees and Phil Serafino

Corporate bond flood

Borrowers are flooding global debt markets at an unprecedented pace as they take advantage of demand from credit-hungry fund managers flush with cash. With corporate bond spreads near a 30-year low, borrowers in the Asia-Pacific region priced the most notes yesterday since 2023 and Europe had a record number of issuers raising funding. Wall Street is forecasting a potential January record of $200 billion of issuance in the US. Pension funds and insurers want to lock in higher yields ahead of expected central bank interest rate cuts and are willing to settle for low risk premiums to do so. Corporate borrowers also are tapping the market before Donald Trump's inauguration in 12 days.  "Issuers are taking advantage of calm markets, low volatility and tight spreads before Jan. 20," said Alfonso Peccatiello, the chief investment officer of Palinuro Capital. "Trump's announcement on tariffs might spoil the party.'' —Tasos Vossos and Caleb Mutua

Word from Wall Street "As politicians in the US (and elsewhere) apparently have zero appetite for fiscal tightening, the bond vigilantes are slowly waking from their Rip van Winkle slumber. The argument that the US government can borrow in extremis because the dollar is the world's reserve currency surely won't hold good forever.'' Albert Edwards Global strategist, Société Générale

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