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Debt sell-off follows passage of budget bill late on Sunday and Moody’s downgrade last week

US assets sold off on Monday as fiscal concerns mounted following the loss of the country’s triple-A credit rating and Donald Trump’s massive tax and budget bill clearing a hurdle in Congress.

Yields on 30-year US Treasuries rose as much as 0.06 percentage points to 5 per cent on Monday during trading in Asia, while 10-year yields rose 0.04 percentage points to 4.52 per cent. Bond yields move inversely to prices.

US equity futures for the S&P 500 and the Nasdaq declined 1 per cent and 1.3 per cent, respectively. Gold prices edged up 0.5 per cent to $3,216 per troy ounce and the US dollar dipped 0.3 per cent against a basket of its peers.

The rise in bond yields came after a key congressional budget committee approved Trump’s tax bill on Sunday evening in Washington and after Moody’s downgraded the US’s triple-A sovereign credit rating on Friday evening. The rating agency warned about rising levels of government debt and a widening budget deficit.

“The bill is helping drive up the long end,” said Subadra Rajappa, head of US rates strategy at Société Générale. “It’s always hard to tell in markets beyond anecdotal evidence from price action, but it does seem consistent.”

On Friday, five Republican lawmakers from the house budget committee had voted against the bill, stalling its progress. On Sunday, the package narrowly passed the committee vote.

Trump had put pressure on his party’s lawmakers to vote in favour of the bill. “Republicans MUST UNITE behind, ‘THE ONE, BIG BEAUTIFUL BILL!’” he wrote on social media on Friday. “We don’t need “GRANDSTANDERS” in the Republican Party. STOP TALKING, AND GET IT DONE!”

The legislation, which includes hundreds of billions of dollars in new tax cuts that are not offset by changes in spending, is expected to increase the federal deficit, which stood at 6.4 per cent in 2024 — well above levels economists view as sustainable in the longer term.

A bigger deficit means more Treasury bonds, driving down prices and lifting yields. Investors sold bonds in anticipation of extra supply and the potential inflationary impacts of the tax cuts.

The administration believes the tax cuts will boost growth, raise revenues and lower the US’s deficit. But the Committee for a Responsible Federal Budget projects the tax bill could add up to $5.2tn to the national debt over 10 years.

Fall in recorded Chinese holdings highlights Beijing’s push to diversify its reserves away from America

China’s recorded holdings of Treasuries have fallen below those of the UK for the first time since the start of the century, underlining an ongoing shift in Beijing’s management of its foreign reserves.

The value of China’s Treasury holdings as recorded by US banks and custodians fell to $765bn at the end of March, down from $784bn in the previous month, while those of the UK rose by almost $30bn to $779bn, according to data published late on Friday.

The crossover makes the UK the second-largest foreign holder of US Treasuries after Japan. It is the first time the UK’s holdings have been higher than the Chinese since October 2000 and is the latest sign that China is seeking to gradually diversify away from US assets.

“China has been selling slowly but steadily; this is a warning to the US” said Alicia García-Herrero, chief economist for Asia-Pacific at Natixis. “The warning has been there for years, it’s not sudden — the US should have acted on this well before”.

The data will come as a cautionary sign for the US administration following news that Moody’s has followed Fitch and S&P in stripping the world’s largest economy of its triple-A credit rating, citing its growing debt and deficit.

Beijing has been gradually reducing its holdings of US treasuries from a peak of more than $1.3tn in 2011, diversifying into other assets including US agency bonds and gold. Some of the fall in the value of China’s holdings could also reflect market moves.

Analysts believe China also holds a growing proportion of its US assets through third party custodians, including Euroclear in Belgium and Clearstream in Luxembourg, which obscures the true level of its holdings. Luxembourg’s Treasury holdings by value were flat in March while Belgium’s increased by $7.4bn from February.

China’s enormous Treasury pile is the result of a multi-decade trade surplus with the US that President Donald Trump is now seeking to reduce. But officials in the US administration have also expressed concern over foreign selling of Treasuries, which pushes yields up and makes debt refinancing more expensive.

The proportion of China’s Treasury holdings that were in short term bills, the most liquid securities that could be most easily sold off in a crunch, in March hit its highest level since 2009.

“Based on the visible data, there is no doubt that China has shortened the maturity of its US portfolio”, said Brad Setser, a senior fellow at the Council on Foreign Relations and former US Treasury official. 

The rise of the UK’s recorded holdings does not reflect its own reserves. Rather, analysts say it reflects London’s role as a domicile for international capital.

Holders in Europe include insurers, banks and custodians. Some hedge funds hold Treasury securities and arbitrage by selling futures or swaps — positions known colloquially as “basis trades”.

Setser said the UK number “likely [reflects] an increase in Treasuries held by global banks, the availability of custodial services in London and potentially some of the activity of hedge funds”.

Analysts said that the data, which only shows moves until the end of March, did not reflect any action taken by China after Trump’s so-called “liberation day” escalation of his trade war.

“It is possible that China could have made significant changes in its reserve management in the last six weeks that will only become clear with more time,” said Setser.

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Are Big Oil companies prepared for a prolonged market downturn?

Executives seek to reassure investors as analysts warn of risks from sub-$60 oil prices

The world’s largest oil companies are braced for a prolonged downturn in crude prices — the third in just over a decade — as they seek to reassure investors that they are prepared for the worst.

Executives at ExxonMobil, Chevron, Shell, TotalEnergies and BP have used their quarterly earnings updates to reassure investors that their balance sheets remain strong, and that they will not be rushed into unnecessary reductions in spending and shareholder returns.

“We are seeing significant downward pressure on prices and margins,” ExxonMobil chief Darren Woods told analysts this month, adding that the $472bn company had prepared for a downturn by cutting close to $13bn in costs over five years. 

“Our organisation has planned for this. We pressure-test our plans and the financial outcomes with scenarios that are more severe than our Covid experience,” Woods said, referring to the 2020 slump that accompanied the pandemic. “No other international oil company even comes close.”

Oil prices dropped below $60 a barrel in April and are forecast to average about $65 for the remainder of the year, as the Opec+ cartel that includes Saudi Arabia and Russia continues to increase supply. Brent crude, the international benchmark, was trading below $65 a barrel on Friday.

Chevron, which is shrinking its workforce by a fifth, reassured investors that it would produce $9bn of free cash flow with oil at $60 a barrel. Shell said it would be able to pay its dividend even if oil dropped to $40, and that its share buybacks would continue at roughly half the current rate at $50 a barrel. 

Shell added that it had not, so far, changed its spending plans. “We’re not asking our businesses to stop on projects,” Sinead Gorman, chief financial officer, said on the company’s earning call.

Patrick Pouyanné, chief executive of TotalEnergies, said the reaction this time was the same as during the coronavirus crisis — “no panic” — and noted how his company had declined to cut its dividend even during the worst of the pandemic. 

Previous downturns in oil markets — including one that stemmed from the price wars between Saudi Arabia, the US and Russia from 2014 to 2016 — forced deep spending cuts on the industry as well as project delays. Debt also rose as Big Oil companies borrowed to maintain operations and shareholder returns.

Some also seized opportunities, such as Shell’s 2015 takeover of BG Group and Chevron’s acquisition of Noble Energy in 2020. “We’re better positioned than others to respond to market challenges and, in fact, take advantage of the opportunities they present,” noted Woods of Exxon. 

Big Oil collectively trimmed capital expenditure plans by 2 per cent over the course of the recent earnings season, estimated HSBC analyst Kim Fustier, who expected further reductions if oil prices remained at current levels.

Wood Mackenzie, the energy consultancy, has forecast $98bn in capital spending this year among the five supermajors — down nearly 5 per cent on 2023.

“They’re in a bit of a wait-and-see mode,” Fustier said. “They clearly don’t want to rush into any irreversible decisions.”

She also noted how the recent slide in crude prices came just weeks after a number of the big oil groups outlined long-term plans based on oil trading above $70 this year, making it tricky to revise guidance so soon. “I think the companies should have presented a plan where cash inflows and outflows are balanced at $65 a barrel, but none of them did,” Fustier added. 

HSBC analysts cited the adjustment to lower oil prices as they cut their 2025 earnings per share forecast for the big listed oil companies, including by 35 per cent for BP and 18 per cent for Chevron.

Bank of America analyst Christopher Kuplent said that while $65-a-barrel oil might not cause major disruption for the majors, any further slide risked a more significant impact.

“My worry is we don’t stay at $65. Our house forecast is that across the second and third quarter, Brent crude will average below $60. That kind of scenario will reveal vulnerabilities,” he said.

Kuplent also said he disagreed with big oil group’s claims that they were ready for a downturn, noting how a decade of cuts had left many companies with limited flexibility for further reductions without endangering oil and gas production.

“Ten years into an efficiency drive that has made a lot of companies a lot thinner, the scope to offer more is much reduced,” he said. 

EU faces extra €10bn bill to refill gas stores after cold winter

Gas prices likely to rise in the summer as countries rush to meet EU target

The EU will need to spend at least €10bn more than last year to refill its gas stores ahead of winter, after the first cold season in four years left its reserves heavily depleted. 

Following Russia’s full-scale invasion of Ukraine in 2022, the bloc agreed to refill storage to 90 per cent of capacity each summer, to avoid disruptions in the colder months. After this winter Europe’s gas tanks were two-thirds empty in March, requiring a significant effort and cost over the summer to restore them to normal levels.

“Europe had the first real winter since the war in Ukraine,” said Ano Kuhanathan, an analyst at Allianz Trade, which provides insurance to traders. He added that a lack of wind for renewable power generation had also pushed up the consumption of gas. 

While gas prices are lower than a year ago, mainly because of lower demand from China, Kuhanathan estimated that it will cost about €26bn to meet the 90 per cent target by November. That compares with €16bn to fill them to 99 per cent last year.

EU countries have recently agreed to more flexibility in meeting the gas storage target, after criticism that the hard 90 per cent goal prompted summer price spikes as governments rushed to fill tanks.

Germany, which is heavily reliant on gas, was among the countries that most vocally called for greater flexibility after Brussels proposed their extension until 2027. 

Revisions to the law could see the target reduced by 7 per cent, casting uncertainty over this filling season as the changes are unlikely to be enacted before the summer.

The EU spent roughly €100bn on importing gas and liquefied natural gas (LNG) in 2024, Kuhanathan said.  

Ample gas reserves are crucial for smoothing prices and reducing the risk of countries having to compete on the open market for gas during surges in winter demand. 

Eurogas, the gas industry body, said that policymakers should ensure “clear and early communication” of the measures.

“Storage obligations carry the risk of further exacerbating the problem of high and volatile wholesale gas prices,” it said.

Kuhanathan said gas traders are not rushing to refill storage because many of them believe prices have further to fall. But a push to refill gas storage at the end of the summer could also cause prices to increase, he warned. 

Analysts at Morgan Stanley believe prices will rise by roughly 10 per cent from current levels over the summer because of the scale of the refilling job. Europe will need to increase imports of LNG by 45 per cent from last year for stores to be 80 per cent full, they said.

Last week, Peder Bjorland, the vice-president of gas trading at Equinor, Europe’s largest gas supplier, said the region would have to pay higher prices to outcompete China and other Asian buyers for gas over the summer. 

“I think price is the most important tool in this game,” he told Reuters at a gas conference in Amsterdam. “China is coming back, and it can be competitive,” he added. 

China, the world’s top buyer of LNG, has recently scaled back gas buying because of favourable weather and a weaker economic outlook. But a temporary truce in the trade war between Beijing and Washington, announced earlier this month, could now mean economic activity, and gas demand, pick up. 

“If Asian demand for LNG cargoes picks up over the summer because of hot weather, the market could tighten and force prices higher,” warned Morgan Stanley in a research note.