A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Rising Tide Lifts All Yields
Share this story:
Andrew Kositkun Senior FX Advisor
The sharp rise in nominal U.S. 10-year yields has been a key market narrative over the past week, with the 10-year Treasury yield now sitting around a one-year high.
While U.S. yields tend to grab most of the attention, the move higher in long-term yields is actually a global phenomenon. Swiss, German and even Japanese long-term yields have all moved higher, albeit with a lag. In the case of the U.K., the pace of its yield increase has exceeded that seen in the U.S. and has given support to the pound.
This correlated move in yields is most likely connected to the belief that rapidly falling infections and hospitalization rates in countries that lead in mass vaccinations such as the U.S. and the U.K. will allow for a quicker re-emergence of global growth. Recently, the U.S. announced that it would increase vaccine supplies to 13.5 million doses a week from 11 million doses previously. Even the EU and other areas that have been vaccine laggards are starting to catch up in the vaccine race.
So while yields are rising at the long end of the yield curve, the supply-and-demand dynamic at the short end of the yield curve is strikingly different. Specifically, markets are focused on the possibility of an influx of U.S. dollar liquidity should the Treasury run down its $1.5 trillion deposit at the Federal Reserve to pay for stimulus measures in the coming months. As a result, the U.S. dollar, relative to many G10 currencies, has actually been losing short-term rate support. From a currency standpoint, this is important, as exchange rates tend to be more supported by short-term interest rate differentials than anything else and help to explain why the U.S. dollar index has given up its February gains despite the steady rise in nominal 10-year yields.
Intuitively, higher yields in the U.S. should mean a stronger dollar, but in the currency markets, interest rate differentials matter more than absolute levels. As long as the reflation-driven move higher in U.S. yields is matched by rising yields in other countries, the argument for a sustained reversal of broad U.S. dollar weakness becomes unclear. Instead, expect dollar support to be expressed through individual currency pairs due to those pairs’ individual dynamics.
Speaking of individual dynamics, recent Fed comments have done little to suggest an imminent move to push back against the rise in long-term yields. If anything, the Fed might be taking the opposite view, as Kansas City Fed President Esther George recently said the rise in bond yields is “not concerning,” as it is tied to growing optimism about future economic activity and shouldn’t lead to tighter financial conditions. This opens up the possibility for a much bigger rise in U.S. rates, relative to the negative yield bloc, down the line and is a key factor arguing against the appreciation of the euro and yen.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
•
Are not FDIC insured,
•
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
•
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
View this email in your browser Want to watch a recording of yesterday's Simply Successful Investing Webinar. Just click here and use passcode 5q59Z&3M.
Tune in for a guide to ETFs and investing strategies for potential long-term success. View in a browser Fidelity Fidelity Log in Creating a portfolio with ETFs: Why and how Creating a portfolio with ETFs: Why and how
Exclusive webinar: The market, my portfolio, and options. Exclusive webinar: The market, my portfolio, and options. View in a browser Fidelity Fidelity Log in The market, my portfolio, and options The market, my portfolio, and options
Comments
Post a Comment