A bond market sale is setting the tone for financial markets, including foreign exchange. The balance is unlikely to return until the yield on the 10-year U.S. Treasury note reaches 2%, a well-known analyst argued on Friday.
“There will be no peace until the United States reaches 2%,” Kit Juckes, Société Générale’s global macro strategist, said in a note.
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A couple of U.S. government bond auctions, which had been a source of nervousness, came out without major problems over the past week, and yields settled on a higher, new range, Juckes said. But with the S&P 500 index closing at a record high on Thursday, the performance of the ten-year TMUBMUSD10Y note,
it fell above 1.6%, weighing on shares.
Growing returns have triggered the rotation of growth-oriented stocks, including large-cap technology-related stocks, toward more cycle-sensitive and often value-oriented stocks and sectors. The Nasdaq Composite COMP, a technology
fell in correction territory, defined as a 10% decline from a recent peak, as yields continued to rise, while the S&P 500 SPX,
and Dow Jones Industrial Average DJIA,
have traded in records. All three benchmarks are positive for the week, with the Nasdaq rebounding on days when yield gains yielded.
Rising yields have resulted in a renewed strength of the dollar, which Juckes said he had no desire to fight at this time. The ICE US Dollar Index
a measure of the currency against a basket of six major rivals rose 0.3% on Friday and has gained 0.9% so far in March.
“The pattern seems clear enough: the equity market is experiencing a turnover in the sector but not a correction; the bond market is looking for a new balance in light of a much improved economic outlook both in the US and elsewhere; some political leaders backtrack on bond movements, with little success, “Juckes wrote.
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“As yields rise, the dollar rises, but when yields rise to a new level, the dollar falls. The pattern is likely to continue until bonds find a balance, unlikely before ten-year banknote yields handle 2, judging by taper bursts and past cycles, ”he said.
Societe Generale
Meanwhile, the Japanese dollar / yen USDJPY,
and euro / Swiss franc EURCHF,
currency pairs are the most sensitive to higher Treasury yields (see chart above), Juckes said, noting that the dollar / yen typically correlates more closely with the real or inflation-adjusted U.S. dollar. yields than nominal rates, while the euro / Swiss franc tends to track nominal yields more closely.
Instead, this year has seen the four (real and nominal yields, dollar / yen and euro / Swissfranc) rise sharply, steadily.
“While US yields are rising, the EUR / CHF and USD / JPY are likely to continue to rise, at least as long as the momentum is so strong. If we reach 2% ten-year banknote yields in in the coming weeks, a silly extrapolation could bring USD / JPY to 111 and EUR / CHF to 0.96, ”he said. “Maybe too simplistic, but these moves are too strong to fight in the short term.”