A sale of bond markets calls the tune on financial markets, also for foreign exchange. The equilibrium is unlikely to return before yields return on the standard 10-year U.S. Treasury note 2%, one well-known analyst argued Friday.
“There will be no peace until the US 10s reach 2%,” said Société Générale global macro strategist Kit Juckes in a note.
Must know: Here’s how far the Nasdaq can fall if the yield on bonds reaches 2%
A few auctions of U.S. government bonds, which have been a source of nervousness, have gone without major problems over the past week, with yields stretching into a new and higher range, Juckes said. But with the S&P 500 index closing on a record high on Thursday, the yield on the 10-year note is TMUBMUSD10Y,
dropped above 1.6%, with a weight on equities.
Rising returns have led to the shift from growth-oriented equities, including large-cap, technology-related equities, to more cyclically sensitive and often value-oriented equities and sectors. The technically heavy Nasdaq Composite COMP,
slipped in the correction range, defined as a 10% decline from a recent high, as yields continued to climb, while the S&P 500 SPX,
and Dow Jones Industrial Average DJIA,
traded on records. All three measures are positive during the week, and the Nasdaq has been bouncing on days when the rise in returns has increased.
The rising yields have led to renewed strength for the dollar, which Juckes said he is not keen on fighting at the moment. The ICE US Dollar Index DXY,
a measure of the currency against a basket of six major competitors, rose 0.3% on Friday and up 0.9% so far in March.
‘The pattern seems clear enough: the stock market sees a sector rotation, but not a correction; the bond market seeks a new equilibrium in light of a significantly improved economic outlook in both the US and elsewhere; some policymakers are pushing back with the securities movement, with little success, ”Juckes wrote.
Read: Fed to stay dovies while Powell calmly channels his inner Gary Cooper
“As yields rise, the dollar rises, but when yields fall to a new level, the dollar falls back. ‘The pattern is likely to continue until bonds find an equilibrium, unlikely to yield ten-year yields a 2-handle, judging by tapered tantrums and previous cycles,’ ‘he said.
Societe Generale
Meanwhile, the dollar / Japanese yen USDJPY,
and euro / Swiss franc EURCHF,
Currency pairs are most sensitive to higher Treasury yields (see chart above), Juckes said, pointing out that the dollar / yen usually correlates more closely with the real, or inflation-adjusted, US. returns as nominal rates, while the euro / Swiss franc tends to keep nominal returns closer.
Instead, this year all four – real and nominal yields, dollar / yen and euro / Swissfranc – have moved significantly higher, he said.
‘While US yields are rising, the EUR / CHF and the USD / JPY are also likely to rise, at least while momentum is so strong. “If we get 2% returns for ten years in the coming years in the coming years, dumb extrapolation could increase USD / JPY to 111, and EUR / CHF to 0.96,” he said. “Maybe too simple, but these movements are too strong to fight in the short term.”