STIR: SOFR Correlation With ESTR Has Collapsed Since The Election
Jul-04 10:13
SOFR futures are stronger this morning (+1.5 to +4.5 ticks), but remain comfortably below levels seen prior to yesterday’s surprisingly robust NFP report (even if it was caveated by some softer details). Euribor futures meanwhile were quick to reverse yesterday’s US data-inspired knee-jerk lower, and have extended higher this morning on renewed tariff concerns (+1.0 to +3.5 ticks).
- Yesterday’s reaction in EUR vs USD rates was illustrative of a broader trend since the US election – namely a breakdown in correlation between one-day rate changes. Eurozone economic conditions have diverged from the US up to and since November, while US tariff policies have generally been expected to have opposite effects on relative ECB/Fed policy stances (net dovish for the ECB, cautious/hawkish for the Fed).
- Since the US election, a regression of one day 2-year SOFR swap changes on ESTR swap changes gives an R-squared of just 0.0589, well below the 0.5105 seen between the start of 2023 and just before the election.
- The US holiday will thin out liquidity and limit volumes into the afternoon, but focus remains on the details of US President Trump's tariff letters, set to be sent out at some point today.
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CROSS ASSET: JGBs Tick Higher On Latest BoJ Taper Speculation
Jun-04 10:12
RTRS sources suggest that “the Bank of Japan is considering slowing the pace of tapering in its bond purchases from next fiscal year onward, a move that would signal its focus on avoiding big bond market disruptions”.
- The piece went on to suggest that “the volatility seen in the super-long JGB market has heightened awareness within the BoJ of the need to ensure its bond tapering plans do not destabilise markets. The BoJ won't react directly to the rise in super-long yields, but is mindful of the risk the move could affect the entire yield curve”.
- JGB futures rally ~20 ticks on those headlines, trading through the Tokyo session high.
- While the idea of a slower/reduced BoJ taper is not new, more weight behind it promotes some demand for JGB futures and very modest weakness in JPY. USD/JPY adds 10 ticks, moving to ~144.20, shy of session highs at 144.38.
EU-BILL AUCTION RESULTS: 3/6/12-Month EU-Bills
Jun-04 10:08
| Type | 3-month EU-bill | 6-month EU-bill | 12-month EU-bill |
| Maturity | Sep 5, 2025 | Dec 5, 2025 | Jun 5, 2026 |
| Amount | E847mln | E1.248bln | E1.217bln |
| Target | E1.0bln | E1.5bln | E1.5bln |
| Previous | E749mln | E752mln | E956mln |
| Avg yield | 1.942% | 1.943% | 1.899% |
| Previous | 2.010% | 2.002% | 1.963% |
| Bid-to-cover | 3.18x | 2.09x | 2.22x |
| Previous | 2.37x | 2.87x | 2.44x |
| Previous date | May 21, 2025 | May 21, 2025 | May 21, 2025 |
FOREX: Global Carry Trades See Threat From Crowded Positioning, Return of Vol
Jun-04 09:51
- The sustained fade in G10 FX implied vol off the post-Liberation Day highs is helping provide a supportive backdrop for FX carry, and while the long-held status of JPY as a funding currency has ebbed since last year's intervention, other currencies have stepped in to take advantage of regional dislocations (most recently HKD and CNY), which are compensating for falling policy rates among traditional carry targets such as the MXN, AUD and others.
- BNY Mellon write that while there is little sign of market volatility picking up (meaning better risk-reward on carry trades) they believe conviction in these carry trades is not strong - and markets need to exercise greater caution amid an increasingly crowded strategy. They flag CHF, CNY and SEK low-yielding, funder currencies, all of which have large current account surpluses (which support a home investment bias in the context of US trade rebalancing), meaning the risk-reward profile for carry trades is likely to become structurally less attractive, tempering expectations around future returns.
- We see the sharp pull lower in local Hong Kong rates (both HIBOR and HKD funding rates) and the TWD spot rally has boosted the currency's status as an APAC funding currency, however persistent pressure on the weak-side of the FX trading band, a building 2025 IPO pipeline and improved corporate activity (bond sales, dividends) may mean pressured local rates are short-lived through the rest of 2025.
