The bond market remains an interesting spot to watch and after the unrelenting selloff (amid deleveraging pressures) in March and April, we are seeing steady bids in the past three weeks. It may be overdue after what has been rather one-way traffic since the start of the year, with 10-year Treasury yields doubling from 1.60% to a high of 3.20% just three weeks ago:
Considering that we have somewhat fully priced in Fed hawkishness (at least for now) in terms of what policymakers are signaling, it is a potential noteworthy trigger for the bond selling to abate. Throw in the fact that the market now expects a lower and sooner terminal rate than a month ago and it sort of makes sense:
In this regard, the market is perhaps seeing that the Fed window to tighten is getting narrower. And one can argue that this is surely due to stagflation and recession risks being on the rise. The BOE is the clear example of that and is surely what the Fed wishes not to become one day.
For now at least, it is keeping the bond rout in-check as yields are set to come down for a third week in a row. That in turn is helping to alleviate some pressure off of the Japanese yen as well.
USD/JPY is now down 0.5% to 126.60 on the day and the technical picture hints at a potential push towards 125.00, that is if a firm drop below 127.00 is sustained; and if the bond market plays ball that is.
