Update : 05/12/2025 - 06:30 am GMT
Memento
US Bond Market
The rise in short and medium-term yields has slightly flattened the US yield curve. As Analystlearner points out this week, the interbank market has not suffered from a lack of liquidity, nor have the markets as a whole. The decline in volatility and the recovery in equity indices reflect a still-well-supplied environment. But does this improvement mask a more uncertain outlook ?
J.F. Snider notes that the 5-year CDS on the United States has reached an all-time high, a sign of distrust that contrasts with relatively balanced market indicators. Since the disappearance of unsecured interbank rates, this CDS has become the main barometer of US sovereign risk, as the new benchmark rates no longer include a bank risk premium.
The rise in the CDS largely reflects political uncertainties, particularly around the debt ceiling and the Trump administration's statements regarding the treatment of sovereign bonds held by non-residents. This situation is raising questions among central banks and international financial institutions and could explain the caution of foreign investors during recent Treasury bond auctions. Upcoming TIC data will confirm or deny this trend.
This distrust is not contributing to a decline in interest rates, and the issue of refinancing US debt remains a concern for the coming months.
On the inflation expectations front, the market continues to reflect well-anchored expected inflation, close to the Fed's target, in both the short and long term. The 2- and 10-year inflation premiums remain stable and close, indicating that expectations are not unanchored. The recent rise in nominal rates is mainly due to rising real rates, rather than a sharp rise in inflation expectations. The structure of risk premiums across the curve therefore did not fundamentally change this week, reflecting continued confidence in the monetary authorities' ability to contain inflation, barring any slip-ups by Trump. It remains to be seen whether the coming week will confirm this stability (CPI) or whether new risks will disrupt the current equilibrium.
Finally, it should be noted that the issuance of the new 10-year bond has significantly widened the basis spread with the 10-year future, signaling additional tension in this segment of the curve, whose yields are expected to continue rising this week.
By @Analystlearner, the repo market has taken a breather this week. Short-term rates have returned to the midpoint of the monetary policy range, the yield curve has steepened, and long-term rates have seen slightly improved liquidity — as reflected, among other indicators, in swap spreads.
However, the structural decline in reserve levels continues to fuel persistent volatility in the repo market. This volatility is increasingly correlated with seasonal cash flows. Given the strong link between repo volatility and liquidity conditions in both FX and equity markets, it will be crucial to monitor money markets.
Upcoming Treasury issuance, combined with Mr. Bessent’s expressed intent to reduce reliance on short-term bills, will likely push repo spreads back toward levels associated with cash pressures.
Overall, refunding conditions remain tight and are expected to stay that way in the months ahead. Still, this temporary period of relief should be closely watched to gauge the market tempo.
All eyes remain on upcoming debt issuances and Donald Trump’s policy agenda.
As of today, SOFR futures and Bills are not pricing in any rate cuts for june meeting. This aligns with an overall forecast of a cumulative 50 basis point reduction by the end of December 2025.
| Volatility (HV)
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Trend |
Historical level |
Risk of violent variation |
Move Index (IV) |
HV - Move Ind. (IV) |
| Long-term |
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High |
High |
|
|
| Short-term |
|
High |
The decline in short-term volatility (HV) continues, with a bonus for the 30-year maturity. The slight rebound observed is limited and has not changed the trajectory of short-term volatility, which is currently struggling to initiate a downward movement in long-term volatility (HV).
The 5-year maturity continues to exhibit the highest average volatility across the curve.
European bond market
The yield curves for German, French, and Italian sovereign bonds remain broadly unchanged compared to last week, with yields rising only slightly, particularly in Germany. This stability has allowed us to carry out a more in-depth analysis of risks on the European market thanks to the development of a new tool, revealing a growing differentiation between the core and periphery of the eurozone, both in terms of sovereign and banking.
France and Germany remain considered benchmarks, with very similar risk profiles and remarkable stability, both in terms of public debt and banking soundness. In contrast, Italy remains exposed to episodes of stress, although it has not experienced any major disruptions or recent structural deterioration.
The most notable signal concerns Spain, which is distinguished by increased investor vigilance, both regarding sovereign debt and the banking sector. It is important to note that, despite this latent distrust, the 10-year yield spread between Spain and Germany has recently narrowed. This movement reflects a relative decline in the perception of Spanish sovereign risk, driven by the outperformance of peripheral bonds and investors' accumulated appetite for yield in a context of stable German interest rates. Overall, this recent dynamic confirms that markets are increasingly differentiating between the core countries (France, Germany) and the peripheral countries (Italy, Spain) of the eurozone. The stability of the Franco-German pair contrasts with the continued caution toward southern countries, but the narrowing of the Spanish spread serves as a reminder that risk perception remains highly reactive to market flows and allocation arbitrage, sometimes out of step with certain fundamental signals. Italy, for its part, remains exposed to episodes of stress, although it has not experienced any major disruption or recent structural deterioration.
The most notable signal concerns Spain, which is distinguished by increased investor vigilance, both with regard to sovereign debt and the banking sector. It is important to note, however, that despite this latent distrust, the 10-year yield spread between Spain and Germany has recently narrowed. This movement reflects a relative improvement in the perception of Spanish sovereign risk, driven by the outperformance of peripheral bonds and increased investor appetite for yield in a context of stable German interest rates.
Overall, this recent dynamic confirms that markets are increasingly differentiating between the core countries (France, Germany) and peripheral countries (Italy, Spain) of the eurozone. The stability of the Franco-German pair contrasts with the continued caution towards the southern countries, but the narrowing of the Spanish spread serves as a reminder that risk perception remains highly reactive to market flows and allocation arbitrage, sometimes out of step with certain fundamental signals.
Regarding the Europeans' approach to the Trump administration's trade offensive, it is difficult for us to fully grasp their strategy, if they even have one. We will return to this topic next week.
The 10-year European spreads relative to German Bunds have slid for France, Italy, and Spain.
The bond market, as a whole, was less volatile than the US market. In this context, the German market stood out compared to its counterparts, which remained completely stable, particularly with 2-year maturities. This lack of variation led to a decline in short-term volatility (HV), which, although slowing, is beginning to weigh on long-term volatility (HV). We remind you of the need to remain vigilant regarding the volatility of the German and French markets.
The volatility spread (HV) of the French bond market relative to the German market has continued to narrow, as has the volatility of the Italian bond market, which continues to decline relative to both the French and German markets.
As of today, Euribor and ESTR futures expect a rate cut of approximately 25 basis points for the June meeting, which is part of a total anticipated cumulative reduction of 50 basis points by the end of December 2025.
You will find details of the various components of European bonds below and more in the Interest Rates section.
EURUSD parity
Supported by the postponement of Fed rate cut expectations, the dollar firmed against most major currencies, recording slight gains against major currency pairs but lacking strength against South American currencies.
The USDCNY followed the dollar's general rebound. However, contrary to interbank market fundamentals, the renminbi, which has recently strengthened against major currencies, is expected to resume its appreciation against the greenback in the short term. Could this be an effect of the ongoing negotiations ? To be continued...
The dollar's recovery is expected to continue, but at a more moderate pace against South American currencies.
The euro has weakened against most major currencies, except for the Swiss franc, where profit-taking continues, and the yen, which paradoxically remains weak against other currencies. This weakness in the single currency is expected to persist, though without escalating into a rout.
The EURUSD pair is unlikely to diverge from the euro’s general trend, which is being reinforced against the dollar by an increasingly pronounced short-term and monetary rate differential in favor of the greenback.
Contrary to the euro's volatility (HV), the dollar's volatility has diverged with a measured increase, primarily driven by movements in the USDINR and USDJPY pairs. This rise in short-term volatility (HV), although moderate, has been sufficient to trigger an increase in long-term volatility (HV), making the dollar more sensitive to any future movements.
In contrast, for the euro, the weak and contained rebound in short-term volatility (HV) has begun to weigh on the trajectory of long-term volatility (HV), allowing it to initiate a relaxation.
This overall dynamic is unlikely to change in the short term for the euro. The easing of tensions between India and Pakistan should help calm the volatility (HV) of the USDINR pair and, more generally, the dollar, which, like the euro, remains at historically high levels of long-term volatility (HV).
Equity Indices
The U.S. economy is showing signs of slowing down while maintaining a certain resilience. Following the results of trade negotiations with the United Kingdom, it is clear that no compromise is possible: the Trump administration is simply seeking to impose a non-negotiable tariff floor and align local standards with those of the United States.
Under these conditions, inflation in the United States is unlikely to stabilize or decline. Despite their economic difficulties, China and Europe will not yield to standards unilaterally imposed by the United States.
In Europe, the situation remains challenging, marked by sluggish growth. However, declining inflation combined with a more accommodative monetary policy offers slightly more favorable prospects. These are further supported, on the one hand, by German stimulus plans and, on the other hand, by European initiatives more focused on the defense sector. Nevertheless, the budgetary situation of countries like Italy and France, the latter also facing political instability, risks fragmenting outlooks among member states.
In Asia, new measures aimed at lowering financing rates and freeing up bank reserves offer little cause for optimism, following fiscal stimulus plans that have been difficult to renew and recent regulatory interventions. This influx of liquidity could allow Chinese stock indices to artificially maintain their position, despite a deteriorating economic situation.
In India, the Nifty is also expected to remain volatile following the confrontation with Pakistan. Confidence, shaken by this episode, risks delaying initially planned investments.
In Japan, the clarity of the country's economic outlook will depend on the outcome of trade negotiations on tariffs. Japan continues to face persistent inflation, and its growth remains heavily dependent on export performance, particularly in the automotive sector.
Stock indices in countries that have implemented or announced fiscal stimulus plans have risen more quickly than others. However, markets as a whole now appear to be topping out, indicating a slowdown in upward momentum.
In a context where all indices display a similar configuration, the decline in short-term volatility (HV) continues, although its intensity tends to decrease. This retreat, expected to continue in a less pronounced manner, exerts downward pressure on long-term volatility (HV), which in turn begins a relaxation movement.
Alerts indicating a potential spike in volatility have emerged across several American and European indices. The tariff negotiations between the United States and China are unlikely to conclude in the short term, and it is improbable that they are the source of these alerts. Unless there is a surprise announcement from Donald Trump, we believe that the announcement of retaliatory measures by the European Union could be the origin of these alerts.
Macron, the 2.0 Marie Antoinette
The section "Macron - Marie-Antoinette" has been moved and will become independent from the rest of the site. All names and facts will thus be referenced by search engines. A button will be added to the main menu to facilitate access to this new section. We will gradually populate the page.
Chronicle of a presidency adrift: Macron in freewheel
The week of our incapable president started with great fanfare at the Sorbonne. One year after slashing nearly one billion euros from universities and research, here he is pulling out of his hat, not a rabbit, but… 100 million! Where does this money come from? From his jewelry box? From the Élysée budget? Mystery. What we do know, however, is that no vote validated this spending. But after all, since when does Macron care about institutions?
Once his show was over at the Sorbonne, direction the Freemasons to talk about secularism. Yes, the same one who had flags flown at half-mast at the pope’s death, because the pope is a head of state. The perfect example of respect for the law and coherence, but for Macron, chaining contradictory postures while taking the French for fools is a daily routine.
The highlight of the week, his latest whim: proposing the French nuclear umbrella to Europe. Problem: France simply doesn’t have the means to ensure this role. Not enough warheads, not enough vectors, not enough of anything. Result: he wants to have his fantasy financed by the French. Luckily, some European leaders still have their heads on their shoulders and called his proposal fanciful, even dangerous. Fortunately for us, Macron doesn’t have the power to impose such a treaty alone. The summary of his action comes from a pro-Macron Ukrainian newspaper, which says: “France doesn’t have the means to ensure this task, but for Macron it’s a way to place himself as European leader.” All is said! He wants France to spit out billions for his posture! See, I was right: Marie-Antoinette!
And as if that weren’t enough, TV Bouygues offers him 2 hours of airtime, mind you, after it cost France 350 million, Bouygues can well give him 2h, 175 million per hour??!! Even on that, Macron has to get ripped off, a pet obsession with this pretentious guy. And who will he debate with? Binet. Two years after deaths, mutilated people, a rule of law trampled by an out-of-control police, here he is today choosing to “dialogue” with Binet. What a joke! Then, he will debate with Robert Ménard, just to give himself the good role opposite a far-right mayor. But it’s indeed under Macron that SA-type thugs from fascist groups can now march in our streets without being bothered. To end the show and dilute his incompetence that ruined the country, he will debate against a Hezbollah who considers that the slightest cent spent on social is heresy; against her, Macron will appear as a disciple of Karl Marx. So sorry, but I’ll be at the pool. Because don’t count on the real topics being addressed: 350 million for Bouygues, 300 for Bolloré, the Kohler-STX affair, the billions lost in New Caledonia, the plundering of Alstom, Renault, etc. etc., which I will put on the website.
By the way, Macron’s record will be filled during this summer break, because being less present, some developments have fallen behind. Denouncing the methods of Jean-Louis Deville, inspector general of finances, takes a huge amount of time. This senior official, who practices harassment, bypasses the law with the blessing of his hierarchy, and refuses to respond to the slightest correspondence, is in fact in freewheel, and the so-called appeals are useless: he must be taken to court, which will be done. But I’ll come back to that later, because you have to see it to believe the Kafkaesque administrative maze that these good-for-nothing civil servants have put in place.
German bond
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