A bond market selloff is calling the tune across financial markets, including for foreign exchange. Equilibrium is unlikely to return until the yield on the benchmark 10-year U.S. Treasury note hits 2%, argued one well-known analyst on Friday.
“There will be no peace until U.S. 10s reach 2%,” said Kit Juckes, global macro strategist at Société Générale, in a note.
A pair of U.S. government bond auctions, which had been a source of nervousness, went off without any major problems over the past week, with yields settling into a new and higher range, Juckes said. The 10-year Treasury yield TMUBMUSD10Y,
Rising yields have triggered rotation away from growth-oriented stocks, including large-cap, tech-related shares, into more cyclically sensitive and often value-oriented stocks and sectors. The tech-heavy Nasdaq Composite COMP,
The rising yields have resulted in renewed strength for the dollar, which Juckes said he wasn’t eager to fight at the moment. The ICE U.S. Dollar Index DXY,
“The pattern seems clear enough: The equity market is seeing a sector rotation but not a correction; the bond market is seeking a new equilibrium in the light of a vastly improved economic outlook in both the U.S. and elsewhere; some policy makers are pushing back against the bond moves, with little success,” Juckes wrote.
“As yields rise, the dollar rallies, but when yields settle at a new level, the dollar drops back. The pattern probably goes on until bonds find an equilibrium, unlikely before 10-year note yields have a 2-handle, judging by taper tantrums and past cycles,” he said.
Meanwhile, the dollar/Japanese yen USDJPY,
Instead, this year has seen all four — real and nominal yields, dollar/yen and euro/Swissfranc — move higher largely in lockstep, he said.
“ While U.S. yields rise, EUR/CHF and USD/JPY are likely to go on trending higher, too, at least while the momentum is this strong. If we get to 2% 10-year note yields in the coming weeks, dumb extrapolation could take 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.”