Yield Shield Peeled

The broader market is struggling with weather to interpret rising yields as a sign of economic improvement, inflation or dislocation in the bond market. On Thursday, an ugly rise in rates (10 yr hit 1.60%) led to a big reversal in risk with CHF leading and AUD lagging. The US PCE report on Friday will add another big risk.

There is a good argument that rising yields reflect confidence in the economy and it’s an argument that Fed members have repeatedly made but it didn’t add up on Thursday as rates shot higher and the softest 7-year Treasury sale on record led to a quick blowout. At the end of the day, US 5-year yields were up 22 basis points to 0.82% and US 10s had briefly hit 1.60%. On its own, 1.6% isn’t anything akin to ‘high rates’ but at the start of the month they were at 0.98%. They’ve moved too quickly for anyone’s comfort and that message reverberated in to a sharp selloff in US equities as the S&P 500 fell 2.5%.

Initially the FX market shrugged off higher yields, early on Tuesday AUD/USD hit 80-cents for the first time in three years. After a strong US durable goods orders report, the Canadian dollar also hit a three year high. But as the jump in yields grew increasingly disorderly, both reversed in a big way. Cable was also sucked back to 1.40.

Importantly, this was a global jump in yields and while the outlook is strong for this year in the US, global central bankers will not appreciate the speed of this move. The Fed will be facing pressure internally and externally to clamp down on rates.

The first step will be verbal intervention. The Fed’s Williams speaks Monday, Brainard on Tuesday and Powell next Thursday so there will be plenty of opportunity.

Yet, if Friday’s PCE report shows unwelcome inflation, they may be forced into action sooner. The consensus estimates on both core and headline are +1.4%.

 

Ashraf Laidi
Ashraf Laidihttp://ashraflaidi.com/
Ashraf Laidi is an independent strategist and trader, founder of Intermarket Strategy Ltd and author of "Currency Trading & Intermarket Analysis". He is the former chief global strategist at City Index / FX Solutions, where he focused on foreign exchange and global macro developments pertaining to central bank policies, sovereign debt and intermarket dynamics. Ashraf had also served as Chief Strategist at CMC Markets, where he headed a global team of analysts and led seminars and trainings in four continents. His insights on currencies and commodities won him several #1 rankings with FXWeek and Reuters. Prior to CMC Markets, Laidi monitored the performance of a multi-FX portfolio at the United Nations, assessed sovereign and project investment risk with Hagler Bailly and the World Bank, and analyzed emerging market bonds at Reuters. Laidi also created the first 24-hour currency web site for traders and researchers alike on the eve of the creation of the euro. Laidi's analysis of currency markets stand out based on his distinct style in bridging the fundamental and technical aspects of the markets. Laidi regularly appears on CNBC TV (US, Europe, Arabia and Asia/Pacific), Bloomberg TV (US, Asia/Pacific, France and Spain), BNN, PBSs Nightly Business Report, and BBC. His insights also appear in the Financial Times, the Wall Street Journal and Barrons. He has given numerous interviews and lectures in Arabic, French, and to audiences spanning from Canada, Central America and Asia/Pacific.

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