Markets were left nonplussed by increasingly erratic U.S. tariff

announcements over the weekend, although nerves have been

soothed slightly by the reduction of tensions at the long-end of

several major government bond markets.

I'll get into all of this below and then explore why the U.S.

government, issuing ever more debt, should be wary about

becoming overly reliant on the kindness of private investors.

Today's Market Minute

* U.S. President Donald Trump said Vladimir Putin had "gone

absolutely CRAZY" by unleashing a massive aerial attack on

Ukraine and said he was weighing new sanctions on Moscow.

* The euro could become a viable alternative to the dollar,

earning the 20-nation bloc immense benefits, if governments

could only strengthen the bloc's financial and security

architecture, ECB President Christine Lagarde said on Monday.

* Japan will consider trimming issuance of super-long bonds in

the wake of recent sharp rises in yields for the notes, as

policymakers seek to soothe market concerns about worsening

government finances.

* Ukraine's security is critical to Europe, but the continent

can no longer rely on the United States to support the country's

war with Russia. The EU, the UK and other willing countries

therefore need a way to support Ukraine that does not require

Trump's permission. The best option is to unlock Russia's $300

billion of frozen central bank assets. Read the latest essay

from Breakingviews columnist Hugo Dixon.

* U.S. President Donald Trump's budget bill is likely to bake in

outsized deficits for years to come. Listen to the latest

episode of Reuters Econ World podcast, where I speak with host

Carmel Crimmins about what that means for U.S. debt levels and

the wider economy.

Trade confusion and long yield relief

After a torrid week for long-dated sovereign debt, some calm was

restored on Tuesday by indications Japan would consider trimming

sales of super-long bonds. Policymakers in Tokyo are seeking to

reduce market concerns about the country's worsening government

finances.

Yields on 30-year Japanese government bonds fell by up to 20

basis points to 2.83% after the report, the lowest since May 8.

The benchmark 10-year yield dropped 5 points to 1.455%. The

dollar rose 0.5% against the yen to 143.9.

Also helping ease pressure on the long end of bond markets

was a Financial Times interview with Britain's debt management

chief Jessica Pulay, who emphasized that the UK had shifted to

shorter-term borrowing this year. Pulay noted that demand for

long bonds from pension funds has waned due to demographics and

pension scheme changes.

UK 30-year gilt yields fell back almost 20 bps

from last week's peaks.

U.S. 30-year yields declined in sympathy,

retreating below 5% for the first time since last Tuesday.

As traders returned following the long Memorial Day weekend,

U.S. stock futures were up smartly, largely because

Trump has backed off from Friday's threat to impose 50% tariffs

on EU imports next month. He instead restored a July 9 deadline

to allow for talks between Washington and the 27-nation bloc to

produce a deal.

European stocks were higher too on Tuesday, with

the euro slipping back after two days of gains on the

confusing policy twists.

The back and forth on tariffs will likely keep trading on

edge, but markets will likely have to get used to this policy

volatility in the weeks and months ahead.

Federal Reserve Bank of Minneapolis President Neel Kashkari

on Tuesday called for keeping U.S. interest rates steady until

there is more clarity on how higher tariffs are affecting

inflation. He warned against simply looking through the impact

of a potential supply side shock.

"It may take months or years for negotiations to fully

conclude, and there could be tit-for-tat tariff increases as

trading partners respond to one other," he said.

This week's release of the April personal consumption

expenditures update - the Fed's favored inflation gauge - will

be monitored closely.

U.S. markets return amid a sweep of economic updates,

including durable goods orders for April and consumer confidence

readings for May.

Meanwhile, tech investors are turning to the big earnings

event of the week. Shares of semiconductor industry bellwether

Nvidia ( NVDA ) gained 2.8% as the company is slated to report

quarterly earnings after markets close on Wednesday.

Elsewhere, Trump Media & Technology Group advanced

10% after a media report said Trump's social media firm planned

to raise about $3 billion to spend on cryptocurrencies such as

bitcoin.

Now to today's deep dive, where I explore how declining

investor appetite for long-duration debt could stress government

funding markets.

Long bond blues stress the 'bedrock'

Bonds had a bruising week recently and investor aversion to

long-dated government debt appears to be rising.

Anxiety over U.S. debts and deficits took center stage as

Trump's fiscal bill passed the House of Representatives -

potentially adding another $3.8 trillion to the $36 trillion

debt pile over the coming decade.

But mountainous government debts across major economies and

unpredictable inflation, amplified by unfolding trade wars, fuel

uncertainty over the central bank interest rate horizon.

At the same time, central banks continue to reduce the huge

holdings of government debt accumulated over the past 15 years,

particularly during the pandemic.

These developments require private investors to take up the

growing slack at a nervy time, even as many of these investors

are increasingly price-sensitive and wary of long-duration

bonds.

Many non-bank private investors embrace long-duration debt.

This includes pension and insurance funds that crave steady

long-term income streams from relatively safe government credits

in order to match their long-term liabilities.

Others, such as mutual funds or hedge funds, may be less

willing to absorb outsized price risks.

And as exchange-traded funds that track long-term Treasuries

show, it's been a dire few years.

The iShares ETF of U.S. Treasuries with remaining maturities

of 20 years or more is down 3.5% for the year so far,

almost as much as the loss in Wall Street's tech-heavy Nasdaq

equity index.

It has now halved in price since it peaked during the

pandemic and is down 30% from the eve of the COVID outbreak.

While "terming out" government debt to longer maturities has

long been seen as a prudent practice to reduce roll-over risks

with too much short-dated borrowing, this strategy may now

contain frailties of its own due to shifts in the investor

base.

With economic and policy uncertainties rife, attention is

shifting toward private investor commitment and market

stability.

MARKET BEDROCK

The International Monetary Fund last week highlighted

potential risks to the functioning of government bond markets

that policymakers need to address to protect what is called "the

bedrock of capital markets".

In a piece that focused on liquidity risks and the smooth

pricing of a market covering some $80 trillion of core

government debt, it pointed out how bank dealers continue to

play a critical role and have expanded sovereign bond holdings.

But it said that the rise in bank dealers' core sovereign

debt had not kept pace with the growth of outstanding bonds.

The stock of U.S. Treasury securities grew nearly fourfold

in the 15 years through 2023, for example, but U.S. bank-dealer

balance sheets expanded by just 1.5 times.

Now, U.S. Treasury securities account for almost 70% of

primary dealers' securities inventories - the highest share in

over a decade - and about three-quarters of their securities

financing is also collateralized by Treasuries.

"The challenge is that dealers' internal limits on

concentrated holdings could curtail intermediation activities,

especially in times of stress," the IMF blog noted.

That leaves the other non-bank financial institutions

(NBFIs) to supplement the role of market makers.

"However, because they (NBFIs) have a generally weaker

mandate to support government bond markets compared to

bank-dealers, they may also quickly curb activities during times

of market stress," the IMF piece said.

"The increasing presence of NBFIs makes market resilience

more uncertain and opaque because they tend to be less regulated

and subject to fewer data reporting requirements."

The IMF then goes on to urge governments to ensure more

"structural resilience" via more central clearing, more timely,

consistent and comprehensive data on market pricing and

transactions and better information on NBFIs' soundness and

reliability in times of stress.

To be sure, bond markets appear to be clearing well despite

the outsize policy upheavals under way. But few doubt that there

are difficult moments ahead and stress at the "bedrock" could be

seismic.

Chart of the day

Europe's STOXX 600 index stock index lost 1% on Friday after

Trump threatened to impose 50% import duties on Europe from June

1, but has since recouped all of that after he said he was

postponing them and continuing negotiations. The euro gained

regardless and hit its highest in three weeks on Monday before

falling somewhat today.

The United States was the European Union's biggest export

partner in 2024, making up 20.6% of exports, according to

Eurostat. Medicinal and pharmaceutical products were the EU's

most exported sector to the U.S. in 2024, followed by motor

vehicles and aircraft and associated equipment, the data showed.

The three largest exporters to the United States in the EU were

Germany, which exported 161 billion euros ($182.62 billion)

worth of goods, Ireland, at 72 billion euros, and Italy, at 65

billion euros.

Today's events to watch

* U.S. April durable goods orders (8:30 a.m EDT), March home

prices (9:00 a.m. EDT), May consumer confidence (10:00 a.m.

EDT), Dallas Federal Reserve May manufacturing survey (10:30

a.m. EDT)

* Richmond Federal Reserve President Thomas Barkin, New York

Fed President John Williams and Minneapolis Fed chief Neel

Kashkari all speak

* U.S. Treasury sells $69 billion of 2-year notes

* U.S. corporate earnings: Autozone

Opinions expressed are those of the author. They do not reflect

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