Market Insights

🏦 G7 Policy Backdrop Central Banks

Where each central bank sits, and what the market expects next.

Key Themes

• The divergence is two sided. The Fed and BoE sit on hawkish holds with falling near-term hike odds, while the ECB and BoJ are still expected to hike in September. Canada is the outlier on the dovish side.
• Three of the G7 have a September decision live. The Fed, ECB and BoJ all meet this month, and the BoE follows on the 17th. After a stretch with almost no policy communication, that is a lot of signal arriving at once.
• Warsh has floated balance sheet tools alongside rate policy, which widens the range of outcomes beyond a simple hike or hold.

🇺🇸 US Rates Treasuries

The long end shrugged off the data. That is the story.

Key Themes

• The data was uniformly soft. Payrolls came in at -23k against +83k expected, with 103k of downward revisions. July CPI was +0.1% m/m and 2.5% y/y, PPI was flat, retail sales -0.6%. September hike odds fell from about 54% to 39%.
• The auctions were the real story. The 13 August 30-year cleared at 5.216%, the highest 30-year auction yield since August 2001, a 25-year high. Metrics were weak across the board: a 0.4bp tail against a -0.2bp average, 2.39x bid-to-cover against 2.43x, and dealers left with 11.6% against a 10.6% average. The 12 August 10-year also drew the highest financing cost at that tenor since 2007.
• Two weak long-end auctions in one week. The market is pricing supply, not the Fed. Breakevens rose 2bp across 5Y, 10Y and 5y5y on Brent's move to $93, while real yields fell 4bp.

What to Watch

• Every long-end auction from here: another tail confirms supply is the binding constraint, not the policy path
• Whether the front end holds its rally into the September Fed decision, or hike odds creep back up on firmer data
• SOFR at 3.62%, down 3bp, for any sign of funding stress

🌐 G7 Sovereigns Global Curves

At 10Y, every G7 market sold off except the US.

Key Themes

• France was the worst 10Y in the G7 at +15bp, the UK second at +12bp. Those are the two sovereigns with live fiscal credibility questions, and the market treated them accordingly.
• BTPs trade through OATs. Italy at 3.99% against France at 4.06% gives a negative BTP-OAT spread for the first time in years. The week before, both sat at +78bp over Bunds and the open question was whether convergence meant French deterioration or Italian upgrade. This answered it: OAT-Bund widened 7bp while BTP-Bund held flat. It is a France story.
• The JGB 2Y hit a record 1.66% and the curve flipped back to steepening, with the 30Y +9bp to 4.02%. The long end no longer rallies on tighter policy credibility, it sells off with global duration.
• Canada was the only G7 front end to outperform, rallying 9bp on benign domestic pricing.

📏 Spreads Relative Value

Where the cross-market stories actually show up.

Key Themes

• Gilts yield 41bp more than Treasuries at 10Y, the widest UK premium of this cycle, out from -34bp the week before. The premium keeps building on the same three legs: fiscal credibility, an inflation path that only peaks in Q4, and an MPC with three members already voting to hike.
• The France to Italy crossover is the trade to be able to explain. A negative BTP-OAT spread would have been unthinkable a few years ago, and it is exactly the kind of thing an interviewer will ask you to account for.
• UST-Bund holds wide across the curve at +136bp in 2Y, +142bp in 10Y and +148bp in 30Y.

💵 US Credit Spreads

Headline indices did nothing. The tail kept bleeding.

Key Themes

• CCC widened another 7bp to 1,024bp after +11bp the week before. Two consecutive weeks of divergence at the bottom of the quality stack while IG, HY and BB sit at cycle tights.
• The BB to CCC gap is 864bp, historically wide, and out from 856bp. When the tail widens while the index does not, dispersion is usually building before the index notices.
• The asymmetry is poor at these levels. At 271bp HY OAS with spread duration around 3.2 years, there is roughly 40bp of remaining compression against a roughly 110bp adverse scenario. The CCC tail agrees with that setup.

📊 Cross Asset Equities, Oil, FX

Oil up, yen up, equities looking through both.

Key Themes

• Equities went flat after the prior week's +268 rally, with VIX at 15. The real moves were elsewhere.
• Brent added $6.8 to $93, the largest weekly jump of this Middle East episode, and the direct cause of the 2bp rise in breakevens.
• The yen strengthened for a second straight week, 1.62 figures to 157.54, consistent with continued MoF defense. The channel that matters for Treasuries is unchanged: Japanese institutions are the largest foreign holders of USTs, and yen defense is funded at the margin by selling them.
• The character of dollar weakness changed. Earlier weakness was policy driven on US FX intervention. This is a duration and energy story, with the broad dollar index at 119, down 1.

📅 What Is Still Ahead Catalysts

A September that decides whether the hawks were early or right.

Bottom Line

• One trade expressed four ways. Falling hike odds and a record JGB 2Y, gilts above 5%, BTPs through OATs, and a 25-year-high UST 30Y auction all say the same thing: markets are charging more for G7 duration.
• September is when the policy path stops being a guess. Four G7 central banks decide this month after a stretch where markets were driving themselves with almost no policy communication.
• If you get asked what you are watching, say the long end. The front end is doing what the data tells it. The long end is telling you what the market thinks about supply, term premium and fiscal credibility, and that is the more interesting conversation.