US Treasury 10-year yields (%) daily chart
It is rather puzzling when you try and quantify the move here with yields rising from 4.15% to 4.42% in just over a week. I mean, we’re still caught within the range seen after the US election for now. But as we move closer to 4.50%, the nerves might start to show up in broader markets as well.
USD/JPY is already a key beneficiary from all this, not least with the BOJ set to keep interest rates unchanged later this week. The pair is also angling for a seventh straight day of gains as seen here.
Circling back to the bond market though, how much of this is tied to Fed expectations and/or how much of this is tied to the political and economic outlook in the US? Now, that’s a really tough question.
There might be a line of thinking that traders are anticipating the Fed to cut this week then signal an outright pause. If so, I reckon they will be disappointed as Powell might not be too explicit about that. That will certainly drag down short-term rates at least. But is the longer end on the rise because of the more confident economic picture?
As a reminder, yields surged higher in the run up to the election as traders sought to price in a Trump win. And they got that at the end of the day.
So, was the latest dip in yields just a correction and we’re now seeing the natural underlying trend resume its course? There’s certainly an argument for that. This line of thinking hinges on Trump bolstering the economy next year, with or without tax cuts. And with the continued economic resilience as of late, the US continues to show that it is the cleanest shirt among the dirty laundry.
In any case, things are certainly heating up ahead of the Fed tomorrow. If there’s any reason for yields to run towards 4.50% and potentially break that after, risk trades will be lining up for some pain in the second half of the week.
