Bond Market Insights

DJIA -1.6% / S&P -1.2% / CCMP -0.4% / US10YR +8.5pts 4.24 / CRUDE -0.3% $68.15 / GOLD +0.7% $2,914 / VIX +2.9% $23.44. US

The chaos continues as tariff wars began. Treasuries were choppy, initially surging amid systematic and CTA buying before stalling and reversing course. There was a massive sale of 10yr futures (TYA), 78,000 lots, which equates to $7.8bn or $5.1 million per basis point move in yields, enough to make things pucker. The 2yr yield, which had sunk to a four-month low below 3.85%, rebounded to close at 3.95%, while the 10-year yield rose from 4.105% to above 4.21%, finishing the session near its highs. The yield curve steepened as traders pulled forward expectations of Federal Reserve rate cuts before adjusting to a collapse in bunds on the defence spending announcement.

Germany’s new coalition government unveiled a sweeping fiscal expansion, marking the most significant deviation from its traditionally conservative fiscal stance since reunification. The CDU/CSU and SPD coalition announced abandoning fiscal shackles with a €500 billion infrastructure and defence investment fund, combined with a suspension of fiscal constraints on defence spending. Under this new framework, military expenditures exceeding 1% of GDP will be excluded from the country’s strict “debt brake” rule, effectively granting Germany open-ended borrowing capacity to rearm its military.

This move, which comes alongside the European Commission’s decision to trigger "escape clauses" that allow an additional €650 billion in defence spending across the bloc, signals a fundamental shift in European economic policy. Market participants quickly reassessed their outlook on the euro, with many now taking an outright bullish stance on EUR/USD in light of Germany’s aggressive fiscal expansion.

German Bund futures fell sharply on the announcement, dropping to a six-week low of 129.87, implying a 10-basis-point jump 10yr yields. Party leaders framed the decision as a "whatever it takes" moment, reinforcing their commitment to a stronger and more independent European defence infrastructure. While uncertainties remain, particularly regarding whether the Greens will back these constitutional changes, there is little doubt that Europe is entering a new era of fiscal policy.

Oil prices settled near December levels, with WTI at $68.09 (-0.41%). The U.S. dollar weakened broadly, with the DXY index falling 1.05%, while emerging market currencies showed resilience. The Mexican peso and Canadian dollar both rebounded after Commerce Secretary Lutnick hinted at potential tariff relief for USMCA compliant goods.

Tonight U.S. Services ISM data and the Fed’s Beige Book, which will provide insights into economic conditions across the U.S.. and tomorrow is the ECB rate decision, where a 25-basis-point cut is widely expected. Eyes will be on President Lagarde’s forward guidance, particularly whether she tempers expectations for further cuts beyond April. Friday is the U.S. Jobs Report, where markets anticipate 155,000 payroll additions and an unchanged unemployment rate of 4.0%.