Worries about the effect of tariffs on the US deficit led Moody’s to downgrade the US from AAA. Whilst this was not unexpected as they were the last agency to do so (Fitch moved in 2023 and S&P in 2011), it does add to the concept that the credibility of the US and the dollar is potentially eroding leading investors to move away from US assets.

The surprise US/China tariff rollback generated lots of excitement as it removed the worst-case scenario, but the tariff story is not over by a long way; when the great orange brain woke up this morning it slapped 50% tariffs on Europe and 25% on iPhones not made in the US. Focus has also returned to the US budget as his ‘big, beautiful bill’ (?) of tax rises and spending cuts makes its way through the system accompanied by some laughable performances by some of his closest advisers trying to explain and justify it (it’s smart, it’s incredible..).

Meanwhile the Fed stood its ground and held rates in defiance of Trump. Strong non farms, steady GDP, inflation worries (inflation expectations have spiked to a 45 year high) have pushed forecasts of the next cut to July although there might not be any this year at all. Fiscal worries and a very weak Treasury auction led to a spike in yields and term premia continues to return with a vengeance, the 30 year spiked intraday to 5.15%. Trump as ever ignores this kind of detail and was much busier touring the Middle East signing big number trade deals with little to no detail and accepting jets as presents.  

The ECB cut rates in the face of continuing weak service PMIs and it looks like they will continue to do so. A much trumpeted (but in reality only a baby step) deal on fishing, food trade and youth mobility was struck between the EU and the UK. This does mark a turning point in relations between the two.

The UK/US tariff deal still means that we remain with 10% and no assurance on individual sectoral tariffs. The EU remains easily our biggest trading partner but we do however hold a lot of US credit risk, $690bn worth of Treasuries, now a bigger holding than the $680bn held by China. The BoE’s QT continues to weigh on the Gilt market alongside the large funding plans of the Labour Government and despite their recent 25bp cut, we go where UST’s go. Further out on the curve we also continue to rediscover term premia, the curve steepening aggressively with the 30 year Gilt hitting 5.6%.

Credit spreads raced back in following the US/China deal but credit still offers attractive all in yields. The primary market has not been dissuaded by recent events and we continue to see strong demand. Reverse Yankee issuance hit a record EUR 70bn as US corporates rush to borrow at lower coupons than $ debt.
 

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