Treasury Yields Curve Flattens as Markets Brace for More Hikes — Market Talk
1547 ET - Treasury yields rise as markets reprice the outlook for interest rates. Futures markets price in two more Fed hikes this year. That prospect drives shorter-term Treasury yields to rise faster than the back end, flattening the curve. U.S. inflation expectations, as measured by one-year swap contracts, cool down but remain above the Fed's 2% target. Industrial production slows down in August. The 10-year adds 0.021 percentage point this week, to 4.995%. The two-year rises 0.099 point to 4.741%, its highest level since July 2024. The spread between the two- and ten-year yields is the narrowest since March. The 30-year yield slips 0.027 point to 5.327%. ([email protected]; @ptrevisani)1512 ET - The dollar loses some steam, particularly against the Japanese yen, as markets price in central bank decisions with an uncertain outlook. The Fed is perceived as more hawkish than the Bank of Japan after both central banks raised rates this week. According to LSEG, the BoJ has a 70% probability of holding in October, compared to 55% odds of a Fed hike. Investors recalibrate the rates outlook, with an impact on currency levels. The dollar strengthens 0.5% against the yen, slowing from nearly 1% earlier. The greenback weakens 0.3% against the Swiss franc and is flat versus the euro. The WSJ Dollar Index rises slightly. ([email protected]; @ptrevisani)1457 ET - Canadian business investment appears to be turning the corner, and should get another lift from a broad corporate-tax deduction that PM Mark Carney unveiled this week, say the economics team at BMO Capital Markets. The firm notes business investment has lagged consumption over the past decade, "but the tide may be stabilizing." Spending on housing as a share of GDP is in retreat after hitting a peak five years ago. Meanwhile, expenditures on machinery and equipment recorded in 2Q the firmest year-over-year growth in the post-pandemic period. Intellectual-property spending is strong. The corporate-tax changes "are the clearest signal to date Canada is focused on pushing the economy forward beyond the ongoing trade uncertainty," BMO economists write. ([email protected]; @paulvieira)1357 ET - Hyperliquid's HYPE token rises 6.7% to $90.83 after the exchange announced that it would enable direct borrowing on its platform. HYPE hit a record $92.43 earlier in the session. Hyperliquid says that it will let users supply HYPE or BTC as collateral for loans, offering 65% and 50% loan-to-value, respectively, according to a statement on its website. The HYPE token has gained 30% in the past two months alone.([email protected])1314 ET - Fitch Ratings raises its outlook on Thailand to stable, citing increased confidence in the government's debt/GDP ratio over the medium term. When Fitch revised Thailand's outlook to negative last September, it forecast general government debt to stabilize at just below 65% of GDP. Fitch now says it expects general government debt to stabilize by fiscal year 2028, which starts in October of next year, at just below 63%. Thailand's current coalition government seems to have a stronger grip on power than its recent predecessors, Fitch says. The country's Long-Term Foreign and Local-Currency Issuer Default Ratings were affirmed at BBB+. ([email protected])1146 ET - Capital Economics says it's a close call but the firm reckons the Bank of Canada will keep its main interest rate unchanged next month, even though Gov. Tiff Macklem opened the door for a hike on Oct. 29. CapEcon's Stephen Brown says the BOC is likely to upgrade its CPI forecasts in its next quarterly forecast, given energy prices, tariffs and shrinking spare capacity. Brown says that while this week's BOC minutes suggested officials are ready to raise rates, policymakers also agreed to gauge whether recent momentum fades due to additional US tariffs. "The governing council appears to want more information," Brown says. He adds that pricing in the overnight index-swap market that points to a 125-basis-point rise in the BOC rate by end of 2027 "looks stretched." ([email protected]; @paulvieira)1123 ET - August PCE inflation is already shaping up as a potentially dovish event, Citi economists Andrew Hollenhorst and Veronica Clark write. They observe that Fed officials increased their forecast for year-end annual PCE to 3.4% from 3.3% in their latest projection. However, revisions to the methodology are expected to shave 0.1 to 0.2 percentage point from the data due Sept. 30. The implication is either that revisions were not included in the new projections or "officials expect very strong (0.30%+MoM) readings in coming months." If the FOMC wants to stay on hold in October, "a softer revised PCE path can be part of the rationale," Hollenhorst and Clark say. ([email protected]; @ptrevisani)1105 ET - The re-acceleration of energy inflation in the U.K. begs the question whether there should be larger indirect and second-round effects in inflation forecasts, say Barclays economists Cian Hennigan and Jack Meaning in a note. They now expect inflation to average 3.1% in 2026 and 3.0% in 2027, an upward revision of 0.1 and 0.5 percentage points respectively. Annual energy inflation rose to 13.8% in August from 9.8% in July. However, the rise in Bank of England's key interest rate they pencil in to 4.25% by February would create a meaningful amount of increased restrictiveness, weighing on the outlook for inflation, they say. Still, the loose labor market is containing risks of second-round effects, they say. ([email protected])1102 ET - Investors could be underestimating the Bank of Japan's resolve to fight inflation. TS Lombard's Rory Green says in a note that the BoJ "is a poor communicator and markets are equally bad at deciphering the bank's statements." He says it took a while for markets to price a September hike after July's forward guidance. "A similar dynamic is at play now," Green says, as the yen weakens 1% against the dollar even after a new BoJ hike to 1.25%. He acknowledges that political pressure against higher rates supports BoJ doves, but notes the U.S. fights in the opposite direction for a stronger yen. Green expects Japan's monetary tightening to end at 2% by July. ([email protected]; @ptrevisani)1049 ET - Supply of new euro covered bonds has reached 169 billion euros ($194 billion) so far in 2026, surpassing the total supply last year, UBS's Annalaura Capuano says in a note. "This underscores the exceptional pace of issuance this year, particularly in recent weeks," Capuano says. Covered bonds are debt securities issued by financial institutions and are backed by a pool of assets such as mortgages. UBS expects euro covered bonds new issuance to reach around 180 billion euros by the end of this year. ([email protected])1048 ET - Credit assets remain appealing given that companies continue to have solid financial positions, Societe Generale's Juan Valencia says in a note. High bond yields make the assets even more attractive, he says. "Yields may rise further but the overall cost of debt moves more slowly and remains very manageable for companies that are still generating large profits." ([email protected])1047 ET - The rebound in British retail sales in August could raise inflationary worries for the Bank of England, RSM U.K. chief economist Thomas Pugh says in a note. Sales rose 0.5% on month in August despite rising oil prices. That is a good sign growth isn't going to fall off a cliff in the third quarter, he says. But the BOE Thursday warned if demand continues to hold up in the face of higher energy prices, it will make it easier for firms to pass on rising input costs to consumers. "Today's retail sales data will play into that fear," Pugh notes. That dynamic would push up inflation, making an interest-rate hike more likely later this year, he says. ([email protected])