U.S. Treasury sell-off continues but swap spreads narrow, with capital closely watching nonfarm payrolls and the progression of the war

(1) The "invisible sell-off" in US Treasury yields continues, but swap spreads are narrowing, showing an interesting structural divergence. The 2-year swap spread is widening against the trend, as money market rates keep rising and SOFR futures continue to fall. The market has postponed expectations for the first Fed rate cut to September, while the eurozone money market is pricing in a rate hike. (2) The general narrowing of swap spreads is related to the intensive issuance of investment-grade corporate bonds this week. After a brief pause at the start of the week, $50.55 billion in new bond supply flooded the market from Tuesday to Wednesday, slightly below the expected $60-70 billion. Large-scale new bond issuance usually prompts investors to hedge interest rates through the swap market, thereby compressing swap spreads. (3) The Middle East conflict is reshaping global interest rate expectations. As the war appears more prolonged and expansive, both oil and LNG prices have soared, casting a renewed shadow of global inflation. Brent crude surpassed $85 per barrel for the first time since April 2024, and supply disruptions from Qatar, the world's second-largest LNG exporter, have intensified the energy panic. (4) The cross-market transmission effect is evident. From the Tokyo open, US Treasuries have been under pressure as Japanese bond yields rose, and further declines in European and UK bonds during the London session intensified the sell-off. German government bond yields posted their largest weekly gain since March 2024, and money markets now price a 60% probability of a European Central Bank rate hike in December. (5) The market is now focused on tonight's US February employment data, which is expected to be distorted by strikes, severe weather, and a smaller-scale government shutdown. In the stock market, global equities may record a 2.6% weekly decline this week, but the US dollar is set for its largest weekly gain in a year, with risk aversion dominating everything.