US Treasury yields extend gains after 10-year breaks 3 percent mark

Anna Jefferson
April 26, 2018

Higher yields draw investors into bonds because of better returns. The buck is now the strongest against the Australian dollar and the Japanese yen.

Ten-year Treasury yields sit closer to 3% than at any time in the past four years, prompting investors to dust off their playbooks for how to trade in an era of relatively higher rates.

"It's a big level in the global marketplace, it's a big psychological level", said Justin Lederer, interest rate strategist with Cantor Fitzgerald in NY. With higher oil prices in addition to tax reform bump factoring into he inflation calculus, rates could reprice higher to 3.25 %( 10 UST) driven by the prospects of higher inflation above-potential growth and a worsening supply-demand dynamic.

While traders and institutional investors are fretting over a possible bear market in bonds, consumer confidence was on the rise in April.

As of January 2018, the size of the USA bond market (as measured by debt outstanding) was almost $41 trillion, compared with about a $30 trillion value for the US stock market - and that's after stocks had a massive run in 2017.

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The latest chatter on the news wires is that the oil price has inflation consequences.

JPMorgan Chase was the biggest drag on the sector with a 0.5 percent decline, followed by Bank of America, which fell 0.4 percent, and Citibank, down 0.5 percent. "I think these higher yield points on the 10-year and longer will be bringing in some real money to put away at levels that we haven't seen in a long time". "That will have knock-on effect in the whole tech supply chain", said Alvin Cheung at Prudential Brokerage, adding that other major Chinese internet and tech companies could become the next target of USA officials.

Higher US yields have played a role in supporting the United States dollars as surging oil prices make for a compelling inflationary storyline. "However, periods of stagflation have produced poor results in both the stock and bond markets". How people value that future dollar depends on interest rates. The further into the future, the more that dollar is discounted.

The Euro and Pound are getting hammered due to an unwinding of consensus positioning.

The euro was steady at $1.2209 after it pared its losses when it fell to $1.2185 earlier. A broadly stronger greenback and growing doubts over a Bank of England rate hike in May sent the currency slumping below the 1.40 level for the first time in over two weeks and to its lowest level since mid-March.

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Meanwhile, US Treasury Secretary Steven Mnuchin stated over the weekend that he may travel to China, which is a move that could alleviate the tensions between the US and China, the world's two largest economies. But there are other negative implications for the Aussie brewing on the back burner.

Recent earnings reports suggest that is becoming harder to do.

"Yesterday was a big day in terms of treasury yields impacting currencies".

"Historically speaking, the 10-year US Treasury in the 3% territory doesn't bode well for the equities market", said Min Byungkyu, a global market analyst at Yuanta Securities Korea, adding, "The market needs some time to absorb the shock from the rising US Treasuries".

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