Weekly market wrap up - 30 May 2025
Japan’s latest auction of 40-year government bonds drew less enthusiasm than usual, with investor demand falling to its lowest level in almost a year. The bid-to-cover ratio, a measure of how strong demand is for the bonds being sold (essentially demand relative to supply), dropped to 2.21, down from 2.92 in March. That shift signals growing caution among investors, especially as global interest rates continue to climb. By the numbers, the yield on Japan’s 40-year bonds rose to 3.14%, reflecting similar trends in long-term US Treasury yields. The move highlights rising concerns about government debt and how it will be managed if growth slows or fiscal spending increases. While there’s a case for this lift in long-term yields to be temporary, it’s a reminder of the delicate balance facing policymakers - both in Japan and globally. Bond investors, who finance government spending, are increasingly demanding an uncertainty premium.
That added cost will ultimately fall on governments - and taxpayers. In the end, investor confidence plays a key role in keeping borrowing costs low.
Oil markets remain under pressure, caught between weakening demand expectations and signs that supply may soon increase. Brent crude is currently hovering around US$64.50/bbl, and while there have been brief pushes higher, momentum has quickly faded. Saudi Arabia is reportedly considering price cuts for its Asian customers, suggesting growing doubts about the demand outlook. At the same time, OPEC+ is weighing a potential output increase from July - adding further pressure to an already fragile market. The combination of softening demand and rising supply is weighing on sentiment, with the US$60/bbl level attracting increased attention.
A move below that mark would likely be seen as a signal of broader economic fragility (slowing global growth) over the medium term.
Minutes from the Federal Reserve’s May meeting revealed just how carefully US policymakers are weighing risks on both sides of the economic outlook. While the Fed left interest rates unchanged at 4.50%, the discussion reflected growing discomfort about the possibility that inflation and unemployment could rise together. The decision to pause came as the US administration’s tariff proposals added uncertainty to the outlook. While the most extreme tariffs (such as the proposed 145% levy on some Chinese imports) have been paused, they haven’t been withdrawn, and markets remain on edge. Fed staff warned of a potentially sharper inflation path this year and a rise in unemployment above 4.6%, which they see as a sustainable long-term level. With volatility in bond markets and questions swirling about the US dollar’s safe-haven role, the Fed is likely to stay on the sidelines until there’s more clarity on trade policy.
Updated forecasts will come with the June meeting, but for now, the Fed appears to be adopting the W3 approach - watch, wait, and worry.
The Reserve Bank of New Zealand trimmed the Official Cash Rate to 3.25% on Wednesday, reflecting growing caution about the global outlook and continued signals of a domestic economy in need of support. But it wasn’t a straightforward dovish signal. A 5-1 split vote among committee members (one vote in favour of no change) contrasted the usual unanimous decision, with Acting Governor Christian Hawkesby framing the internal divergence as a “healthy sign” of policy at an inflection point. The inflection suggestion (alongside a firmer than anticipated tone in the statement) prompted markets to adjust future easing expectations, shifting to an implied terminal OCR of 3.00%, from 2.75%, which that shift in turn prompting an elevation of the interest rate swap curve.
In essence, the RBNZ delivered a cut but kept its options open.
Authors: Zoe McCane, Sam Duncan, Duncan Roff and Ganan Jeyakumar
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