Global Bond Rout Accelerates Even As Dollar Rally Fizzles

Thursday, September 28, 2017
By Paul Martin

by Tyler Durden
Sep 28, 2017

In a continuation of trading patterns observed over the previous two days, on Thursday the global bond rout deepened in the aftermath of the release of President Trump’s tax-cut plan, Janet Yellen’s recent hawkish comments and renewed optimism over the health of the U.S. economy. While global stocks were mostly mixed as investors tried to assess the implications of the much-anticipated tax proposal, there was less doubt in the bond market, where 10Y Treasurys tumbled as a result of heavy stop loss selling once the 200-DMA (2.3255%) was taken out, sending yields to three month highs around 2.35% as accelerating selling spread to all global rate products.

Bund futures slid from the open, with yield curves steepening as 10y yield briefly breached 0.5% for the first time since early August amid a surge in volume after the Treasury sell-off gained momentum in Asian hours.

“The market had given up on the Trump reflation trade and this is coming back with a bit more detail on tax plans,” said Commerzbank analyst Rainer Guntermann. “At the same time, this gives the Fed more ammunition to hike rates in the coming months.” Trump’s tax plan offered to lower corporate income tax rates, cut taxes for small businesses and reduce the top income tax rate for individuals.

Also helping to boost the dollar, the plan included lower one-time low tax rates for companies to repatriate profits accumulated overseas, which analysts say would lead to a temporary phase of sizable dollar buying. At the same time, others said it could be an uphill battle to get the changes approved. “It is hard to expect this proposal to pass the Congress smoothly.” Takafumi Yamawaki, chief fixed income strategist at J.P. Morgan Securities. “We have to pay attention to how the Republicans will view this,” he added “It is possible that the net fiscal spending will be smaller than what the stock markets expect.”

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