“There is no peace” for markets until the 10-year Treasury yield reaches 2%, says strategist

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,
1.623%
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
-0.78%
fell in correction territory, defined as a 10% decline from a recent peak, as yields continued to rise, while the S&P 500 SPX,
-0.01%
and Dow Jones Industrial Average DJIA,
+ 0.80%
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
+ 0.27%,
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,
+ 0.50%
and euro / Swiss franc EURCHF,
+ 0.27%
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.”

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