Build back better bashes bonds

US yields rise ahead of Biden infrastructure speech

The implications of President Biden’s Build Back Better programme are starting to dawn on financial markets. Overnight US yield spiked sharply higher, and although those losses were unwound by the day’s end, the message is clear, another USD3 trillion of US government spending means more debt issuance even if taxes are also to rise. With the global recovery pushing prices and inflation higher, steepening yield curves seem inevitable.

Despite US bonds unwinding their losses intraday, equity markets still finished lower on Wall Street, and the US dollar powered higher, while gold wilted before the onslaught. With the end of the month and the quarter upon us, we can expect portfolio rebalancing flows to shove markets around and potentially send out some misleading short-term signals. I suspect that some of those types of flows were behind the bond market’s late recovery yesterday.

All eyes will now be on the US president’s speech this evening in Pittsburgh, where the new infrastructure package’s first details will be unveiled, notably, how it will all be paid for. Interspersed with that will be the US ADP Employment release, expected to show a 550,000 increase in jobs. A higher print will likely pressure US yields again as it leads to expectations of this Friday’s Non-Farm Payrolls being revised upwards.

In the Asia-Pacific this morning, more evidence came in that the region’s economic recovery is accelerating and the effects of the global semiconductor shortage. Starting with Japan, Industrial Production disappointed, falling 2.10% MoM in February. The chief culprit was falling motor vehicle production due to a lack of, you guessed it, semiconductors.

Elsewhere though, the news was all good. South Korean Industrial Production in February rebounded after Lunar New Year led by semiconductors, while Retail Sales came in below expectations. In China, both the Manufacturing and Non-Manufacturing PMI’s showed an impressive post-Lunar New Year rebound at 51.9 and 56.3, respectively. Australian Building Permits for February, meanwhile, unwound the holiday slump and leapt by 21.60%.

The picture is more mixed in ASEAN. Thailand Industrial Production for February fell through a combination of Covid-19 control measures and the Lunar New Year, while Singapore bank lending rose only slightly. Malaysia also downgraded if 2021 GDP growth forecast due to Covid-19 escalation, weighing on the KLCI.

The overall picture shows that both Asia and Australia’s recovery continues apace, even if semiconductor shortages continue to make their presence felt in global supply chains, and domestic demand remains subdued in parts of Asia due to closed borders over Lunar New Year and Covid-19. As Asia puts both behind it, the data should continue accelerating. The main risks to that premise being geopolitical tensions leading to trade disputes and the worsening virus outlook in the short-term for major economies like the European Union and India.

Looking ahead, we have a raft of inflation data from the Eurozone and German Unemployment. Throw in the month, and quarter-end rebalancing flows, and it is likely to be a messy session ahead. The main act, though, will be the presidential infrastructure announcements later this evening.

Lastly, my kitten Twinkle’s forecast yesterday that bitcoin’s rally would continue proved remarkably prescient. PayPal’s announcement that it would accept crypto payments overnight gave Bitcoin another leg higher, rising to around 59,000 of fiat currency US dollars. Once again, though, the 2.40% rise was a muted one by bitcoin’s lofty standards, although the crypto Sons of Anarchy will say that is because the market is “maturing.” I believe it is more likely because the US dollar is rallying powerfully and rising yields globally are diminishing impacts, much as gold is suffering because of the same.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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