Morning Bid: The bond vigilantes are resting, for now

Reuters

2 days ago

LONDON, July 3 (Reuters) - Donald Trump's "One Big Beautiful Bill" is heading towards a final yes-or-no vote this morning, after House Republicans advanced the U.S. president's landmark tax but and spending legislation. Markets are in something of a holding pattern ahead of monthly jobs data, while UK bondholders are recovering after a nasty reminder of what concern about the long-term fiscal picture can do to government borrowing costs.
Mike Dolan is enjoying some well-deserved time off over the next two weeks, but the Reuters markets team is here to provide you with all the information you need to start your day.
Today's Market Minute
* Republicans in the House of Representatives advanced U.S. President Donald Trump's massive tax-cut and spending bill toward a final yes-or-no vote early Thursday morning, appearing to overcome internal party divisions over its cost.
* Big investors are mobilising to trade through weeks packed with wild-card events that may shatter the calm in stock markets and drive big swings for assets they see as exposed to both positive or negative surprises, from gold to corporate credit.
* The U.S. has lifted restrictions on exports to China for chip design software developers and ethane producers, a further sign of de-escalating U.S.-Sino trade tensions including concessions from Beijing over rare earths.
* The tariff deal between the United States and Vietnam will impact the energy generation mix that powers the fast-growing Vietnamese economy, says ROI columnist Gavin Maguire.
*Is gold the next metal to be added to the list of "critical minerals"? ROI columnist Clyde Russell argues that gold may not be a vital component of advanced manufacturing, but the precious metal appears to be undergoing a subtle shift in how it is viewed by governments and investors.
The bond vigilantes are resting, for now
As the OBBB heads towards approval, it might be time for investors to think about what the fiscal implications are. The bill, which guts a number of key social benefits for some of the poorest Americans to pay for tax cuts, cleared a final procedural hurdle needed to begin debate on its content, with a final vote expected today.
Non-partisan analysts say the bill will add $3.4 trillion to the nation's $36.2 trillion debt pile over the next decade. When Trump started floating the basics of the bill on the campaign trail last year, bond yields began to grind higher, reaching a peak of 4.8% around the time he took office in January, as investors began to price in the impact of the legislation on the country's already-strained finances.
Benchmark 10-year Treasuries are currently yielding 4.25%, but they're up from around 3.6% last September, as the presidential race heated up, despite a jumbo half-point cut from the Federal Reserve.
The damage to 30-year notes has been even more severe. Thirty-year yields, the benchmark for mortgage rates, have risen to 4.8%, from below 4% in the same timeframe.
Pressure from Trump on Fed Chair Jerome Powell to cut rates has not let up, including numerous insults like calling him "too late" and "an average mentally person". But his latest social media post, calling for Powell to "resign immediately", has barely caused a stir in the markets.
There's no doubt that anticipation around today's non-farm payrolls data is white-hot.
Right now, traders are placing a 25% chance on the Fed cutting rates at the July meeting. They see at least two rate cuts over the remaining four meetings this year, which suggests that an NFP print that falls short of the expected 110,000 is, to an extent, baked in.
An index of U.S. economic surprises has fallen to its lowest in nine months in the last week, because data has generally missed expectations. An upside surprise in payrolls is generally not that common either. In the last year, the initial reading has only beaten expectations half the time. Beats and misses in other employment surveys are also not reliable indicators of what to expect from the more comprehensive government report.
Investors around the world are becoming less indulgent of governments' increasingly strained long-term finances, as deficits balloon and economic growth wobbles. As a result, long-term bond yields tend to bear the brunt of any concern they have, as witnessed in Wednesday's rout in the UK gilt market.
The British government's U-turn on its proposed welfare reform now means finance minister Rachel Reeves is at risk of busting her own self-imposed fiscal rules. The sight of a clearly upset Reeves in parliament, on TV, was enough to ignite one of the worst selloffs in 10-year gilts this year, which at one point, rivalled that of 2022.
Bond market reaction to Trump's bill may be muted for now. A massive spike in yields is no laughing matter, so it's worth remembering the bond vigilantes aren't dead, they're just resting.
Chart of the day
The chance of the Fed delivering its first rate cut of 2025 this month have crept up to 25% from next to nothing just a few weeks ago. The data paints a picture of an economy that is slowing, but one where growth is not falling off a cliff, particularly as the labour market has continued to hold up. The June employment report could move the needle on those July odds.
Today's events to watch
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(This story has been corrected to fix the date of payrolls release and the dateline)