Barclays says renewed pressure on long-end bond yields, fed by fiscal concerns and heavy AI-related borrowing, is becoming a bigger risk for markets. The U.S. Treasury has expanded buybacks in response, while widening bond spreads in France add a fresh flashpoint in Europe.
Barclays flagged renewed bond market jitters this week, with long-end yields moving higher across the U.S. and other major developed markets despite inflation pressures remaining broadly contained. Strategists led by Emmanuel Cau tied the move to fiscal concerns and growing competition for capital.
Fiscal concerns and AI borrowing add to rate pressure
The latest U.S. payrolls, retail sales and CPI data point to a gradual cooling in the economy, though Barclays noted risks are increasing with oil prices above $90 a barrel. Fiscal concerns remain in the background, while rising equity and debt issuance from corporates has added further pressure on rates.
Barclays pointed specifically to sizeable borrowing needs from hyperscalers funding AI-related capex as a contributor to the upward pressure on long rates. In response, the U.S. Treasury expanded its buyback operations. According to Barclays strategists: "policymakers are willing to act around the margins should long-end yields continue to rise", though the bank's rates team believes the direct market impact is likely modest.
Equities hold near highs as the dollar takes the hit
Equities were softer this week amid the macro jitters, though major indices remain close to their highs. Strong earnings continue to provide a cushion against higher rates, the strategists noted, preventing a more meaningful risk-off move.
The main casualty of the latest yield dynamics has instead been the dollar, which weakened as investors demanded a higher policy risk premium and sought safety in gold. In the FX space, strategists said the dollar's decline has benefited most major currencies, with the euro the biggest gainer, pushing EUR/USD to its highest level since May.
Looking ahead, Barclays flagged the Jackson Hole symposium next week as a key focus, with comments from Kevin Warsh potentially serving as a catalyst for rates markets. Nvidia's earnings next Wednesday will also be watched, both for AI demand signals and for what they imply about the sustainability of the broader AI capex debt cycle.
France becomes a fresh flashpoint
Within Europe, France has become a focal point, with OAT spreads widening to around 85 basis points, close to post-Covid highs, amid growing fiscal concerns ahead of this autumn's budget negotiations. French spreads have underperformed peripheral peers with stronger growth and fiscal trajectories, briefly trading wider than Italian BTP spreads this week.
French domestic equities have mirrored this weakness. With budget negotiations and elections set to keep scrutiny on France elevated over the coming months, strategists said OAT spreads may remain high and continue to act as a headwind for domestically exposed French stocks.
Source: Investing.com
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