US bond selloff cools, but risks prevail

The selloff in US equities eased yesterday as pressure in the bond space declined. But the news is far from reassuring for a sustainable relief: US politicians continue to turn a blind eye to the stress building in the sovereign bond space. The House of Representatives passed Trump’s ‘beautiful’ tax bill yesterday—with just one vote. But one vote is all it takes to send the bill to the Senate, which is narrowly controlled by the same Republicans who proposed it.

In case you missed it, the bill aims to cut spending on social welfare and climate-friendly programs in order to fund tax cuts. The thing is, even if it gets through the Senate, it still has to pass the bond market test. Investors in US Treasuries are increasingly uncomfortable with the country’s ballooning debt, and may not be willing to finance Trump’s budget ambitions without demanding higher yields.

Unsurprisingly, appetite for US solar stocks is going from bad to worse. Enphase—the star of the 2020-2022 solar rally—plunged nearly 20% yesterday following the US vote to cut clean energy tax credits.

Meanwhile, US yields have eased slightly. The 10-year yield fell 10 basis points from its high of 4.62% to trade just above 4.50% this morning, likely on the back of dip-buying interest from investors keen to lock in a 4.5% return. The 30-year yield, on the other hand, expanded to 5.15% and is now consolidating around the 5% mark. Still, the crisis is far from over. The risk of another selloff lingers, as higher yields continue to pressure US equity valuations—mathematically, the higher the yields, the lower the present value of future cash flows.

The S&P 500 erased its early-session gains and closed slightly down. The Dow Jones ended the day flat, while small and mid-cap stocks recorded slightly deeper losses—likely weighed down by stronger-than-expected S&P Global PMI numbers, which showed improvement in both manufacturing and services activity in May. This may reflect the temporary relief to tariff pressures, though price pressures continued to rise.

As a result, the US dollar was better bid during the Thursday session, though selling pressure returned in Asia. In contrast, Europe’s PMI data disappointed. Both services and composite PMIs unexpectedly slipped below the 50 threshold—into contraction territory—possibly due to lingering tariff uncertainties. Bundesbank President Joachim Nagel warned earlier this week that the German economy could stagnate this year, with better prospects next year as government spending kicks in. But for now, the slow pace of recovery remains a concern for investors who were more optimistic at the start of the year.

Still, the euro is performing well against a basket of G7 currencies. It’s gaining against the dollar, the British pound (as the UK also grapples with budget issues), the Aussie, the Kiwi, the Canadian dollar, and even the Japanese yen—though not against the Swiss franc. This relative strength is partly because the euro is increasingly being seen as a reasonable alternative to the US dollar as a reserve currency.

Also, lower energy prices are a welcome relief for German economy, which has lagged due to the European energy crisis in recent years. A sustained decline in energy prices could help lift growth prospects and support the euro—especially if inflation remains under control and the European Central Bank (ECB) remains supportive. In this context, the widening yield differential between the US and the Eurozone is driving a rise in ‘reverse Yankee’ issuance—US companies, particularly those with European operations, are now issuing euro-denominated bonds to benefit from lower borrowing costs. According to Bloomberg, European corporate bonds are averaging around 3.18% in yield, compared to 5.3% in the US. This improving appetite for European debt adds another leg of support to the euro.

In commodities, crude oil prices took another hit yesterday after reports emerged that OPEC+ is considering a sizable production hike in July—reportedly 411,000 barrels per day—to meet growing demand. However, demand prospects remain uncertain amid ongoing trade tensions... So this move may be an attempt to appease Donald Trump, who has long lobbied for lower energy prices, or possibly to penalize member states that have repeatedly breached their quotas. Either way, OPEC appears less willing to cut supply to support prices. Consequently, US crude fell to $60.60 per barrel yesterday. While there is psychological support around the $60 level, the failure to breach the 50-day moving average earlier this week suggests that geopolitical tensions alone are not enough to push prices sustainably higher—unless they escalate into something far worse, which we obviously don’t hope for.

From a technical perspective, US crude remains in a bearish trend below $65.30 per barrel, the 38.2% Fibonacci retracement that marks the divide between a year-to-date downtrend and a potential medium-term bullish reversal. Any escalation in Middle East tensions could trigger a spike in prices. Such geopolitically driven rallies may present interesting tactical opportunities, but they are likely to be short-lived. If the weekend brings any bad news and Monday opens with a jump, it would be wise to set profit targets.