Bond Market Update

Hit by Moody's Downgrade

• U.S. Treasuries were sold in the overnight futures trade in response to Moody's announcement after Friday's close that it downgraded the U.S. credit rating to Aa1 from Aaa (outlook to stable from negative) amid concerns over the increase in government debt and interest payment ratios that are at significantly higher levels than other similarly rated sovereigns. Treasury Secretary Bessent called the Moody's downgrade a "lagging indicator." Selling is broad-based, but the long end of the curve is feeling the brunt of the downgrade. The 10-yr note yield is back above 4.50%, and the 30-yr bond yield is back above 5.00%; meanwhile, the dollar is also under pressure. The U.S. Dollar Index is down 0.9% to 100.20. The downgrade comes as Congress is negotiating a reconciliation bill that is expected to add to the budget deficit. A full House vote is expected late this week, according to Politico.
• Yield Check:
  • 2-yr: +4 bps to 4.02%
  • 3-yr: +5 bps to 4.01%
  • 5-yr: +8 bps to 4.14%
  • 10-yr: +10 bps to 4.54%
  • 30-yr: +12 bps to 5.02%

• News:
  • Moody's Ratings (Moody's) has downgraded the U.S. long-term issuer and senior unsecured ratings to Aa1 from Aaa and changed the outlook to stable from negative. This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.
  • Treasury Secretary Scott Bessent in an interview says Moody's downgrade is a "lagging indicator," accoridng to NBC News
  • Treasury Secretary Bessent said tariff rates could return to April 2 levels for countries that do not negotiate in good faith, according to NBC News
  • House Budget Committee advanced large reconciliation bill that includes tax cuts, spending cuts, energy reform, immigration reform, and a debt ceiling increase. The full House vote is expected late this week, according to Politico
  • President Trump will speak with Russian President Putin and Ukrainian President Zelenskyy separately today after Russia launches largest drone attack on Ukraine since war began, according to Politico
  • Atlanta Fed President Raphael Bostic (not a voting FOMC member) CNBC interview: Leaning toward one rate cut this year; Treasury markets are functioning quite well, more concerned with what is happening with Fed mandates
  • Japan's Prime Minister Ishiba repeated that current tariff levels are unacceptable and that he is looking for a "win-win" trade agreement with the U.S.
  • The European Commission lowered its 2025 growth forecast for the eurozone to 0.9% from 1.3% while the outlook for 2026 was cut to 1.4% from 1.6%
  • ECB policymaker Wunsch said that the ECB may have to cut rates below 2.00%, but also said that he does not expect a 50-basis point cut at this time
  • China's April Industrial Production 6.1% yr/yr (expected 5.7%; last 7.7%), April Retail Sales 5.1% yr/yr (expected 6.0%; last 5.9%), and April Fixed Asset Investment 4.0% yr/yr (expected 4.4%; last 4.2%)
  • Eurozone's April CPI 0.6% m/m, as expected (last 0.6%); 2.2% yr/yr, as expected (last 2.2%). April Core CPI 1.0% m/m, as expected (last 1.0%); 2.7% yr/yr, as expected (last 2.4%)
• Commodities:
  • WTI crude: -0.9% to $61.93/bbl
  • Gold: +1.9% to $3248.10/ozt
  • Copper: +1.2% to $4.65/lb
• Currencies:
  • EUR/USD: +0.9% to 1.1265
  • GBP/USD: +0.8% to 1.3379
  • USD/CNH: +0.1% to 7.2119
  • USD/JPY: -0.5% to 144.92
• The Day Ahead:
  • 08:45 ET: New York Fed President Williams (FOMC voter)
  • 08:45 ET: Fed Vice Chair Jefferson (FOMC voter)
  • 10:00 ET: April Leading Indicators (Briefing.com consensus -0.7%; prior -0.7%)