Government bond markets in both the US and Europe are adjusting as fiscal dynamics on both sides of the Atlantic point to evolving yield landscapes, according to ING's latest Rates Spark commentary.
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In the US, expectations for June's monthly budget balance are improving. While markets are braced for a $30bn deficit, following May's $316bn figure, the Congressional Budget Office (CBO) anticipates a surprise surplus of $24bn. This is attributed to 'timing issues on the spending side, and large reductions in Department of Education and FDIC costs.' A key driver is tariff income, with customs duties expected to be up 90% year-on-year for fiscal 2025, or $50bn in cash terms.
'If realised these data will be supportive for Treasuries,' ING notes. 'The revenue benefits from tariffs and the cost-cutting from Department of Government Efficiency should act up front to calm the deficit data. It's in 2026 when the tax cutting bill hits revenues.'
US Treasury auctions this week saw decent demand, with the 30-year auction clearing at a slight premium, contributing to a retreat in yields. The 10-year yield settled around 4.35%.
Meanwhile, in the Eurozone, long-end rates have begun to climb again. The yield on 10-year Bunds has returned to 2.7%, edging closer to the March peak of just above 2.9%, reached when Germany first announced its fiscal stimulus. ING attributes the uptick to multiple factors, including reduced inflation expectations and the upcoming €850bn in German debt issuance planned through 2029.
'There are still good reasons in our view to look for a further gradual increase in longer rates,' the report states. 'Especially that latter component vs OIS, will likely have to increase once the planned debt increase… fully feeds through into the debt agencies debt plans.'
The European morning will bring UK GDP and industrial production figures, while Italy is set to auction up to €8.75bn in short- and medium-term bonds. ECB speakers Panetta, Vujcic and Cipollone are also expected to provide further commentary.
The broader takeaway for investors is clear: while headline volatility may ease, structural shifts in fiscal policy, whether tariff-driven surpluses in the US or stimulus-fuelled borrowing in Europe, continue to shape long-end rate expectations.
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