US and China — Managed stability
Last week, the long-awaited meeting between Trump and Xi took place in Beijing, marking the first visit by a US president to China since 2017. The key message emerging from the meeting was one of “managed stability”: both sides signalled a willingness to cooperate, while most of the key areas of disagreement were deferred to future discussions. Iran was one of the main topics discussed. Both sides agreed that the Strait of Hormuz should remain open, although China’s messaging was considerably less interventionist than that of the US. No official readout suggested any concrete agreement or breakthrough. Taiwan was another central issue. Xi placed significant emphasis on the topic, warning that mishandling the Taiwan question could seriously jeopardise the broader US-China relationship. Technology was also likely part of the discussion, especially as President Trump was accompanied by several leading US tech CEOs. However, no major breakthrough appears to have been achieved on this front. Overall, the meeting reduced near-term tail risks, but it did not resolve the underlying strategic tensions between the two countries.
UK — Challenging times
Following Labour’s poor performance in the local elections, pressure on Starmer has continued to build. A leadership challenge to Sir Keir Starmer now appears increasingly likely. Gilts sold off sharply last Monday and Tuesday on concerns that Wes Streeting could mount a challenge, although this ultimately did not materialise and markets briefly found some relief. However, tensions resurfaced on Thursday after Andy Burnham, the Mayor of Manchester, returned to the spotlight. Burnham is not currently an MP, meaning he cannot directly launch a leadership challenge unless he first wins a by-election. Markets reacted negatively to the renewed political uncertainty. The pound moved lower, while gilts returned to recent lows, with the 30-year yield trading just below 5.8%, close to the highest levels seen in decades.
The broader concern is that the Labour Party may shift further to the left. From a market perspective, Burnham is seen as one of the more challenging outcomes, as investors would likely price in higher fiscal spending, rising debt issuance, and a reduced likelihood of the fiscal consolidation expected before the next general election.
Duration — No more gentle treatment
Last week, fiscal dominance returned as the key driver of global bond markets. The UK led the move, but the pressure quickly spread to other developed markets. In the US, the Treasury sold 30-year bonds at a yield above 5% for the first time in years, while the 10y10y Treasuries forward rate came close to 6%. In Japan, the 30-year JGB yield rose above 4%, reaching a level not seen in recent history. This reflects a broader repricing of long-end bonds globally. Markets are increasingly differentiating between governments that have fiscal space and those that do not. The combination of elevated debt levels, already-large fiscal deficits, and a worsening inflation outlook after the Middle East shock has reduced investors’ willingness to give governments the benefit of the doubt. With second-round inflation effects still possible in the coming months and US CPI already at 3.8%, markets are becoming far less tolerant of fiscal slippage: there is no longer much patience for irresponsible fiscal policy, and bond markets are beginning to punish it more aggressively.
Algebris Investments’ Global Credit Team
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