Are rising Treasury yields here to stay?
10-year yields have climbed back above the 3.00% level yesterday and continues to trade higher on the day now at 3.06%. That's the highest level yields have traded in four months.
Back in May when yields climbed above the 3.00% level, it quickly fell as the Fed reiterated slower pace of rate hikes and geopolitical tensions continue to linger setting a more risk off mood in markets.
But this time around, yields are rising despite trade tensions between US and China escalating. That argues a case that we may see a more sustained upside in yields to come towards the end of the year. So, how exactly does this impact currencies?
Although the recent rise in yields is a bit convoluted as it also correlates with a move lower in the dollar, higher yields by right should actually help provide tailwind for the greenback. But again, trading is all about expectations.
In late January to early February, markets were even freaking out about the prospect of higher yields and we weren't even trading close to 3.00% at the time. Equities sold off heavily and the dollar and yen benefited from the rout in Treasuries.
And in mid-to-late April, rising yields towards the 3.00% provided the spark needed for the dollar to embark on its bullish run that we have seen for most of 2018. However, in May, even as yields rose to 3.12%, markets were less perturbed as there was plenty of time to digest the move higher that was anticipated since February.
Fast forward to now, and that is exactly the same reaction we are getting. We're trading back to levels seen in May so this is nothing new for markets - yet. Equities are still gaining today as market sentiment has improved while the dollar continues to lag behind as key technical levels are called into question (EUR/USD, GBP/USD, DXY).
The greenback may not get any support from yields now but if there is a sustained break to the upside and when we start entering more unfamiliar territory (if yields break above year's highs, it would be highest since 2011) it argues for a stronger dollar when the time comes. I reckon it could take a move towards 3.25% for that to happen.
The only real threat to all of this is the Fed deciding to pause its tightening cycle or drop any hints of that possibility. That will ultimately undo a substantial amount of the moves that we have seen in both the dollar and yields this year.
