US TSYS: Asia Wrap - Yields Edge Higher
TYM5 has traded lower within a tight range of 111-13 to 111-19 during the Asia-Pacific session. It last changed hands at 111-13+, down 0-04 from the previous close.
- The US 2-year yield is a little higher, dealing around 3.80%, up 0.02 from its close.
- The US 10-year yield is a little higher, dealing around 4.289%, up 0.02 from its close.
- Headlines have crossed from the NYT that the first trade announcement from the Trump administration will be with the UK. See this link for more details.
- The BOJ minutes via Bloomberg showed a policy committee member expressing the opinion that "there is a good chance that the strengthening tariffs of the United States will have a significant adverse effect on Japan's real economy."
- “The committee member emphasized that if the possibility of adverse effects from tariffs increases, "it will be necessary to more carefully consider the timing of raising policy interest rates."
- A pretty muted response from US treasuries to the trade deal headlines, stocks had a good pop higher(ESM5 +0.80%) and have held onto these gains for now.
- The 10-year Yield range seems to be 4.10% - 4.45%, price is back to the 4.25/30% support/pivot within that range. Awaiting the next catalyst for some direction
- Data/Events : US Initial Jobless Claims
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JGBS AUCTION: 30Y Supply Shows Very Poor Demand Metrics
The 30-year bond auction delivered disappointing results. The low price came in at 100.00, falling short of dealer expectations according to a Bloomberg poll. The cover ratio declined to 2.9582x from 3.4997x, while the auction tail widened significantly to 0.75 — the largest since 2023 — up from just 0.12 previously, all pointing to noticeably weaker demand.
- This follows a 10-year auction earlier in the week, which showed mixed demand metrics.
- As noted in our auction preview, today’s supply lands against a backdrop of elevated global market volatility, following President Trump’s announcement of reciprocal tariffs last week.
- With these dynamics in play, today’s 30-year auction was always going to be a key test for investor demand amid ongoing uncertainty.
- The 30-year JGB remains approximately 1bp cheaper than pre-auction levels in early afternoon trading.
JGBS AUCTION: 30-Year JGB Auction Results
The Japanese Ministry Of Finance (MoF) sells ¥600.6bn 30-Year JGBs:
- Average Yield: 2.414% (prev. 2.500%)
- Average Price: 99.75 (prev. 96.57)
- High Yield: 2.457% (prev. 2.508%)
- Low price: 99.00 (prev. 96.45)
- % Allotted At High Yield: 33.8235% (prev. 92.5925%)
- Bid/Cover: 2.9582x (prev. 3.4997x)
CROSS ASSET: Risk Parity - Is The Party Over ?
Over the last 15 years there has been a mass migration to passive funds in the trillions of USD’s. The growth in these funds have been extraordinary at the expense of the active funds and in 2024 total assets in passive mutual funds and ETF’s surpassed those in active ones.
- With the allure of low fees, broad diversification and liquidity, Risk Parity became the new buzz word.
- The Cons though are beginning to mount. Capital floods into the same names, amplifying market weightings.
- No fundamental discrimination, it will buy whatever the index holds regardless of macro risks or price discovery. As long as money comes in the fund continues to pay the highs.
- This all works very well in a 15 year bull market that has consistently been protected by the FED put.
- What happens in a bear market ? Redemptions spike and just like when they buy on the way up at the highs, there is no fundamental discrimination on execution so as redemptions hit the fund will sell at the lows.
- This can amplify downside risks to the market especially in the names that are most heavily held.
- As you can see from the graph below Risk Parity has put in a lower high around the 850 area and is now looking to break below its pivotal 750/750 support. A move back through here would see redemptions begin to increase and the negative feedback loop in stocks would add a serious headwind to risk.
Risk Parity Index
Source: MNI - Market News/Bloomberg
