The liquidation of the bond market is setting the tone in the financial markets, including the exchange rate. The balance is unlikely to return until the yield on the 10-year U.S. Treasury bill reaches 2%, a well-known analyst argued on Friday.
“There will be no peace until the US 10 reaches 2%,” said Kit Juckes, global macro strategist at Société Générale, in a note.
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Two auctions of U.S. government bonds, which had been a source of nervousness, went smoothly last week, with yields settling into a new and higher range, said Juckes. But with the S&P 500 index closing at a record high on Thursday, the yield on the 10-year note TMUBMUSD10Y,
declined above 1.6%, weighing on inventories.
Increasing returns have triggered the rotation of growth-oriented stocks, including technology-related large-cap stocks, for stocks and sectors that are more sensitive to the cycle and often value-oriented. The high-tech Nasdaq Composite COMP,
fell in the correction territory, defined as a 10% retracement from a recent peak, as yields continued to rise, while the S&P 500 SPX,
and Dow Jones Industrial Average DJIA,
traded on records. All three benchmarks are positive for the week, with the Nasdaq bouncing on days when rising yields have slowed.
The rising yields have resulted in a renewed strength for the dollar, which Juckes said he is not looking forward to fighting at the moment. The ICE US Dollar Index DXY,
A measure of the currency against a basket of six major rivals, rose 0.3% on Friday and rose 0.9% so far in March.
“The pattern seems quite clear: the stock market is seeing a sector rotation, but not a correction; the bond market is seeking a new balance in light of a broadly improved economic outlook in the United States and elsewhere; some policymakers are resisting headline movements, with little success, ”wrote Juckes.
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“As yields rise, the dollar goes up, but when yields stabilize at a new level, the dollar falls backwards. The pattern is likely to continue until the bonds find a balance, unlikely before the 10-year banknote yields have a double loop, judging from previous tantrums and cycles, ”he said.
Societe Generale
Meanwhile, the dollar / Japanese yen USDJPY,
and EUR / Swiss franc EURCHF,
Currency pairs are the most sensitive to higher Treasury yields (see chart above), said Juckes, noting that the dollar / yen normally correlates more closely to the real, or the inflation-adjusted US. yields than nominal rates, while euro / swiss franc tends to follow nominal yields more closely.
Instead, this year saw all four – real and nominal yields, dollar / yen and euro / Swiss – rise to a large extent at the same pace, he said.
“While US yields are rising, EUR / CHF and USD / JPY are expected to continue to trend upward as well, at least as long as the momentum is strong. If we get 2% yield on 10-year banknotes in the coming weeks, a stupid extrapolation could take USD / JPY to 111 and EUR / CHF to 0.96, ”he said. “Perhaps too simplistic, but these movements are too strong to be fought in the short term.”