Bond Market Analysis

Structural Repricing, Labor Inertia, and What the Market’s Missing Markets are grappling with a rare, structural repricing at the long end of the U.S. yield curve—not driven by panic, but by shifts in fiscal, in capital flows, and investor expectations. Across the UST curve, 30-year yields are rising while 2s, 5s, and 10s rally. This kind of sustained steepening alongside front-end strength is a dislocation rarely seen. The market is questioning whether the long bond still deserves its historical risk-free premium. Real-money investors are repositioning. Pimco, DoubleLine, and TCW have publicly flagged long-end underweights. Open interest in ultra-long bond futures has fallen sharply. The 30-year now trades near or above the Fed’s estimated long-run neutral rate. Investors are demanding more term premium amid massive fiscal deficits and inflation volatility. ***Crowding out of the private sector is not theoretical--is already underway. Budget deficits remain above 6% of GDP. Treasury auctions, especially at the long end, are seeing weaker demand. Foreign buyers like China and Japan are stepping back. The Fed isn’t in the game. Term premium models like Adrian, Crump, and Moench from the New York Fed and Kim-Wright model confirm what markets are pricing: capital is getting more expensive, and investors want to be paid for holding duration.*** Credit markets are showing early signs of stress. CCC bonds are down nearly 3.5% YTD, dispersion is rising, and high-yield spreads are widening quietly. It’s not a credit event yet—but the cracks are forming. On the labor side, inertia is defining the cycle. The unemployment rate remains low, but it masks labor hoarding. Firms are reluctant to fire—but not hiring either. JOLTS data confirm this: hiring has slipped to 3.4% from 3.9% pre-COVID, while the discharge rate is down to 1.1%. Quit rates are also lower. As our senior adviser Jon Hilsenrath put it: this is a wait-and-see labor market. Not expansion. Not contraction. Just frozen. This leaves the Fed boxed in. A “bad cut” (in response to labor weakness) likely requires the unemployment rate to rise to ~4.5%, per Fed guidance. Labor dynamics don’t support that path. The “good cut” (disinflation without job losses) remains possible, but tariff-driven inflation risks could derail it. Bottom line: The long end is breaking for structural—not cyclical—reasons. The curve is steepening due to supply, deficits, and lost sponsorship—not stronger growth. Real-money is rotating into the belly. Credit is weakening quietly. Labor is frozen. Capital realignment and workforce inertia are defining this phase of the cycle. Full memo and desk-level flow detail: https://lnkd.in/eezuYXAM #macromarkets #inflation #rates #bonds #credit #StoneX #labor #fiscalpolicy #crowdingout

Bond markets are sending a blunt message: credibility has a price. Long-dated yields remain stubbornly high, not because inflation is out of control, but because investors no longer trust the fiscal and political anchors in key economies. The so-called “risk-free” rate isn’t risk-free anymore. In the U.S., the Federal Reserve faces its toughest credibility test since the 1970s. Markets see political intrusion—Trump’s second term, probes into Fed officials, open pressure on independence. That uncertainty forces investors to demand more yield to hold Treasuries. The result isn’t a funding crisis, but a higher cost of capital for everyone. In the U.K., Chancellor Reeves has locked herself into strict fiscal rules to avoid another Truss-style debacle. But yields are still near 30-year highs, signaling markets don’t buy the math. Borrowing is up, revenues underperform, and policy paralysis risks becoming its own credibility trap. The humiliation of an IMF-style rescue isn’t far from traders’ minds. France is drifting in its own way—€3 trillion in debt, deficits over 5% of GDP, and politics in turmoil. Bond spreads against Germany are widening toward crisis levels. Ratings agencies are circling. Paris risks being priced like Italy, not like a core eurozone sovereign. For Europe, that would be a seismic shift. The bigger point is clear: markets now demand a premium when trust in institutions erodes. Elevated yields aren’t a temporary inflation response. They’re a structural repricing of credibility. That means higher funding costs, weaker growth, and more volatility ahead. Credibility, once lost, is brutally expensive to buy back. For more, see our Nomura CIO Corner: https://lnkd.in/e4TCax_g #Markets #Bonds #Investing #Policy #CIOPerspective

Bond Types, Pricing Dynamics, and the Role of Machine Learning - Fixed income markets encompass a wide spectrum of instruments—government, corporate, municipal, high-yield, floating-rate, inflation-linked, and convertible bonds—each with distinct pricing drivers. Government bonds reflect the term structure of interest rates and expectations of future monetary policy, while corporate and high-yield bonds incorporate credit spreads, default probabilities, and recovery assumptions. Inflation-linked securities are tied to breakeven inflation, and convertibles embed option-like characteristics requiring hybrid valuation models. - Traditionally, bond pricing has relied on discounted cash flow analysis, spread models, and stochastic term structure frameworks. However, the increasing complexity of global markets has accelerated the use of machine learning to enhance these methods. - Applications include: -- Predicting credit spreads using supervised learning on macroeconomic and firm-level data -- Modeling yield curve dynamics with techniques such as LSTMs and Gaussian processes -- Enhancing default probability estimation through ensemble methods applied to balance sheet and market data -- Detecting mispricings across bond markets via anomaly detection and clustering algorithms - By combining financial theory with data-driven methods, practitioners can better capture nonlinear relationships, improve forecast accuracy, and manage risk in environments where traditional parametric models may fall short. - As bond markets evolve amid rate volatility and shifting liquidity conditions, machine learning offers a complementary toolkit for pricing, hedging, and portfolio construction. #FixedIncome #BondMarkets #MachineLearning #InterestRates #QuantFinance #Data #hedging #clustering

What's the bond market signalling here? Bond markets are often referred to as ''smarter'' than equity markets in predicting what's next for the economy. Yet the reality is a bit more nuanced. Today, bond markets are pricing the Fed to proceed with ~175 bps of cuts in the next 12 months hence bringing Fed Funds from 5.25% to 3.50%. How does one interpret this? The typical superficial analysis involves looking at these cuts in a simplistic fashion: 175 bps in a year is a robust cutting cycle, so that must mean inflation has collapsed or even a mild recession has hit the US economy. But what if we think in scenarios? 1) Recession 2) Soft Landing 3) Sticky inflation / Structural ''Higher for Longer'' A more useful way to think about the ~175 bps number is to think of it as the weighted average of scenarios probabilities and Fed actions in each scenario. 1) Recession: 350-400 bps of cuts 2) Soft Landing: 100-200 bps of cuts 3) Sticky inflation / Structural H4L: 0-50 bps of cuts This is a simple split - you can add more layers too (e.g. deep or shallow recession, etc). The point is that through the option market you can pinpoint what are the market-implied probabilities for each scenario. Today, the bond market thinks the following: - Recession: 20% * 400 bps cuts - Soft Landing: 50% * 150 bps cuts - Sticky inflation / Structural H4L: 30% * 25 bps cuts The weighted average of these probabilities and Fed cuts in each scenario is reflected in that single ~175 bps of cuts you see on the screens. But a lot more information can be extrapolated by looking at single probabilities and scenarios. If you are interested in getting regular and granular updates about these probabilistic scenarios and pricing, ping me (Alfonso Peccatiello) on Bloomberg to try out my macro research.

While tariffs and trade have driven stock markets this year, in recent weeks we have seen a shift in investor focus – to the bond market. Bond yields globally have been inching higher as debt and deficit levels are poised to climb. In the U.S., this comes as Moody's downgrades the U.S. credit rating, a new tax bill is passed by the House, and recent Treasury auction results have been mixed. Overall, we know rising debt levels can weigh on economic growth, as higher interest payments may crowd out more productive investments, like R&D and infrastructure spending. However, keep in mind a couple of mitigating factors as we consider the impact of elevated debt levels: 1) Historically, periods of higher debt/GDP have not coincided with higher yields – and in many cases it has been the opposite. 2) The old "TINA" adage likely still applies to the U.S. Treasury market – "There is no alternative": The U.S. Treasury market is one of the deepest and most liquid and regulated financial markets globally and still offers yield to economies, institutions and households at relatively low-risk. Read more in our Weekly Wrap authored by Angelo Kourkafas, CFA.

Alarm bells rang this week in the US bond markets. What foreigner entities hold the most US debt? Japan and China. It was another wild ride this week in the US equity markets, but the volatility in the bond markets are a less followed and also an important story. 💰 Total US federal debt outstanding - aprox $36 trillion 💰 Annual interest payments on debt - aprox $ 1 trillion Total foreign holders, about 22%. - Japan - aprox $1 trillion - China - aprox $800 billion Why Do Foreign Entities Own So Much U.S. Debt? Foreign entities, including governments, central banks, and private investors, hold a significant portion of U.S. debt for several economic and strategic reasons: 1. Safety and Stability The US $ is the primary global reserve currency and U.S. Treasury securities, historically, are considered one of the safest investments due to the "full faith and credit" of the U.S. government. 2. Liquidity The U.S. Treasury market is the largest and most liquid bond market in the world, allowing foreign investors to easily buy and sell securities as needed. 3. Trade Imbalances Countries with trade surpluses with the U.S., such as China and Japan, often reinvest their dollar earnings into U.S. Treasury securities to stabilize their currencies and economies. By holding U.S. debt, China keeps its currency (the yuan) weaker relative to the dollar, making its exports more competitive in global markets. 4. Portfolio Diversification Foreign governments and private investors use Treasuries to diversify their portfolios. 5. Strategic Economic Relationships Holding U.S. debt strengthens economic ties between countries, as it creates mutual dependencies. 6. Central Bank Reserve Management Many foreign central banks hold Treasuries as part of their foreign exchange reserves to back their own currencies and stabilize their economies during financial crises. So what are the risks of foreign ownership of US debt? Deteriorating relationships could lead to selling driving interest rates up. While not clear who sold, selling did lead to extreme volatility and higher yields. Why this matters? US Treasury rates are the benchmark for all other kinds of debt, they are like the heartbeat of the financial system. #bondmarkets #usdebt #economy #treasuries

I wanted to share a recent paper I've written on a timely and critical topic: the impact of higher yields on corporate bonds. In this paper, I explore the potential challenges faced by weaker issuers in an environment of rising rates. I also provide an analysis of how different segments of the corporate bond market—investment grade, high yield, and loans—react to rate changes, and the broader implications for corporate borrowers.

As recession odds have increased, we are paying close attention to economic data and market-based measures of risk to try and discern the outlook for future economic growth. While many are aware of the moves in the stock market, which gets most of the financial press, we lean heavily on messages from the bond market in our analysis. The absolute level of rates, shape of the yield curve and inflation expectations are all important. But at the top of the list might be credit spreads. Bond investors know their returns are capped by the cumulative total of cash flows as bonds are, primarily, issued and mature at the same price. Hence, changes in the perception of the economy, and with it the repayment ability of bond issuers, can be a vitally important marker for economic growth expectations.

📉 Foreign Ownership of U.S. Treasuries Is in Long-Term Decline Did you know that foreign investors currently hold ~33% of U.S. Treasury securities? That might sound significant — and it is — but its not just the level that matters, its the direction of travel: ➡️ A decade ago, that number was closer to 50%. ➡️ The share has been in a steady, structural decline since 2014. Why does this matter? 🌍 Global central banks are no longer the price-insensitive buyers they once were. 🇨🇳 Countries like China and Japan have reduced their exposure, citing diversification, rising hedging costs, and geopolitical risk. 📈 Meanwhile, domestic buyers — U.S. households, institutions, and the Fed — have picked up the slack. But with deficits rising and issuance ballooning, can domestic demand alone support the market? This trend has major implications: 1. Interest rate volatility may increase as the marginal buyer changes. 2. The bond market becomes more sensitive to shifts in domestic liquidity and risk sentiment. 3. And over time, it challenges the assumption that the world will always have an insatiable appetite for U.S. debt. Something to keep a close eye on. 📊 The structure of Treasury demand is evolving — and with it, the implications for interest rates, fiscal policy, and markets. #Macroeconomics #USTreasuries #Geopolitics #FiscalPolicy #Markets #Investing #Dollar #BondMarket #GlobalEconomy #USDebt