Treasuries shrug at the ceasefire

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Good morning. Stock markets are celebrating the US-Iran ceasefire, despite gaps in what we know about the deal that one could (unlike the Strait of Hormuz, still) drive a supertanker through. The bond market is not quite as pleased. Meanwhile, Brent crude oil retreated further, sinking towards $80 a barrel. How did all the energy experts get it so wrong, even while the oil futures market was getting it more or less right?

Speaking of wrong, in Monday’s letter Rob mixed up his billions and trillions, and should have used the latter in relation to the SpaceX IPO. Thank you if you were one of the 1.75tn people who emailed in to point this out.

In today’s newsletter, I look at Treasuries’ measured response to the ceasefire, and Katie considers the tech bond avalanche. Email us: [email protected] 

Peace & Treasuries

It was no surprise that the stock market rose on the news of the US-Iran agreement yesterday. But we were a bit taken aback by the more muted reaction in the Treasury market, especially considering that just a few weeks ago yields were hitting multi-decade highs on war-driven inflation fears. 

Yields have come down a bit since last Thursday, when a ceasefire started to look credible. Still, the Treasury yield curve is a long way off from where it was prewar:

Nor do futures markets indicate any meaningful shift in expectations for Fed policy since Thursday. Rates staying unchanged at the next two meetings has been overwhelmingly priced in. The odds of a 25-basis-point increase at the Fed’s October meeting have dipped to one in four, from about one in three on Wednesday. But before the war the odds were roughly zero.

So why are Treasuries seeing the glass half empty, while stocks see it full to the brim? Three points:

• There are still a lot of unanswered questions around the deal. It’s a memorandum of understanding, not a permanent peace deal. It hasn’t been signed, and we don’t know the details. The Iranians have cast doubt on US President Donald Trump’s claim that the Strait of Hormuz will not be tolled. Israel is unhappy. The stock market, in the grip of tech mania, just isn’t paying attention to these nasty details. The ever-dour bond market is.

• Inflation in the US is not just about oil. Three consecutive strong jobs reports and services inflation stuck at 3 per cent make rate cuts hard to justify and rate increases a nagging possibility.

• Bond traders aren’t going to make any big bets until they get clarity about Kevin Warsh’s leadership at the Fed. Warsh’s first meeting as chair is this week. He made a lot of dovish talk before his appointment but no one knows if he meant it. Treasury markets may not move much until we find out.

Treasuries are reflecting how uncertain the situation in Iran remains. Equities are in party mode.

(Kim)

Everything is computer, credit edition

Nvidia does not need money. It has money coming out of its ears. It sweats money. It’s worth about $5tn and it holds $42bn in net cash it could spend on M&A, buying back shares, R&D or impressionist paintings. Yet the chips monster has decided to issue $25bn or more in bonds, in maturities from two to 30 years. Why?

One reason might be that, war or no war, benchmark US interest rates may be heading up and not, as previously anticipated, down. PGIM, for instance, is now looking for three quarter-point increases from the Fed this year, albeit with three cuts in 2027. So Nvidia may just want to lock in low rates now, for a project to be disclosed later.

A rather less satisfying but more likely explanation: just because it can.

I’m old enough to remember when companies tapped the bond markets because they needed to for some particular reason. But corporate bond markets today are full of people shouting “shut up and take my money”. It has worked for Alphabet and Amazon — those two have been issuing bonds at a blistering pace this year in a huge range of currencies and investors have gobbled it up. So, in a way, Nvidia would be foolish to turn down the cheap money on offer.

Some bankers think we’re entering a golden age of big US companies issuing huge amounts in euros. The tech companies have proven the demand is there for these so-called Reverse Yankees, and the companies themselves like to mix up the currencies a bit. Ironically, this, rather than homegrown superjumbo issuance, could be the thing that forces European debt markets to scale up.

As I mentioned in my column at the weekend, the tech debt binge is pulling corporate credit markets in some weird directions. But as the below chart from Man Group shows, hyperscalers’ share of the investment-grade bond market remains very small compared to the value share of the S&P 500:

Usually investors balk at companies borrowing lots of money fast because the borrowers’ leverage ratios get out of hand. But these are some of the most rock-solid companies on planet Earth. Even hundreds of billions of dollars of borrowing will leave their balance sheets looking healthy.

Companies are getting cheap money; are bond buyers getting a raw deal? Not necessarily. According to M&G Investments’ Richard Woolnough, some of the tech debt is weirdly cheap from the point of view of investors, too. Bond investors simply cannot absorb concentrated issuance like this in the way stock investors can, so sometimes marginal buying is constrained and the bonds trade a bit below what their credit quality would imply. His words:

The combination of strong fundamentals, policy-driven investment and temporary supply pressure is opening a window into high-quality credit at more favourable valuations than might otherwise be expected.

Today’s surge in Big Tech borrowing is not just a story about funding growth — it is also creating a rare entry point for bond investors and an opportunity to invest in Big Beautiful Bonds.

Bond markets are doing some weird stuff as they adjust to tech’s new reality.

(Martin)

One good read

We need to talk about Russia.

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