US yields jump to multi-year highs on Fed tightening bets, bond market turmoil

US Treasury yields surged on Wednesday, with the revenue of the 10- and 30-year notes breaking past the key 5% level.
A mix of strong US data, Fed tightening expectatio, and low demand for US Treasuries is boosting yields this week.
These levels suggest higher borrowing costs for families and businesses, which would threaten economic growth.

Guillermo Alcala FXStreet

US Treasury yields stretched to their highest levels in years on Wednesday, fuelled by a mix of rising expectations of further monetary tightening by the US Federal Reserve (Fed), following upbeat US business activity data and a poor US Treasury bond auction. These levels are consistent with higher borrowing costs in mortgages, credit cards or corporate loans, ultimately posing a significant strain on economic growth. The market has performed a risk-off reaction, weighing on stocks and lifting the US Dollar (USD).

The yield on the 30-year Treasury bond trades at 5.444% on Thursday, its highest level in 22 years, and the benchmark 10-year has reached 5.148% for the first time since 2007 after a whopping 20-basis-point jump from Wednesday’s lows. The 2-year yield, which is closely related to Fed monetary tightening expectations, rallied to two-year highs at 4.494%

Long-term securities have thus crossed the 5% level, considered a psychological threshold, which, apart from driving borrowing costs to unaffordable levels, might prompt investors to move away from stock markets to risk-free government debt.

Strong US data and weak demand for US Treasuries boosted yields

US yields surged on Wednesday as preliminary S&P Global Purchasing Managers' Index (PMI) data showed strong business activity. These figures, coupled with higher wages and rising costs amid high energy prices, boosted expectations that the US central bank will have to tighten its monetary policy soon to keep the economy from overheating.

Fed Governor Michael Barr confirmed those views later on Wednesday, affirming that “further rate hikes are likely needed to ensure timely return to the 2% inflation.”

Beyond that, a five-year US Treasury auction drew shockingly poor demand, which, according to MUFG analysts, highlights investor unease around the US rates outlook.

Against this backdrop, MUFG warns that “FX [is] more vulnerable to a carry unwind given how well these trades have done in this incredible low FX vol environment.” In such a shakeout, MUFG expects “high yielders across EM would suffer most while the yen and Swiss franc would outperform,” as investors rotate out of riskier carry positions into traditional safe-haven currencies.

Economic Indicator

S&P Global Manufacturing PMI

The S&P Global Manufacturing Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US manufacturing sector. The data is derived from surveys of senior executives at private-sector companies from the manufacturing sector. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the US Dollar (USD). Meanwhile, a reading below 50 signals that activity in the manufacturing sector is generally declining, which is seen as bearish for USD.

Economic Indicator

S&P Global Services PMI

The S&P Global Services Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US services sector. As the services sector dominates a large part of the economy, the Services PMI is an important indicator gauging the state of overall economic conditions. The data is derived from surveys of senior executives at private-sector companies from the services sector. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. A reading above 50 indicates that the services economy is generally expanding, a bullish sign for the US Dollar (USD). Meanwhile, a reading below 50 signals that activity among service providers is generally declining, which is seen as bearish for USD.

AUD/USD hangs near three-week low, below 0.6950 as traders await US NFP report

AUD/USD hits a three-week low during the Asian session on Friday as the RBA’s dovish shift and a rout in equity markets weigh on the risk-sensitive Aussie. However, the recent slump in US bond yields to a two-month low keeps US Dollar bulls on the back foot and limits losses for the currency pair as traders look to the US NFP report for a fresh impetus.

USD/JPY bounces off three-week low; keeps the red near 157.65 as focus remains on US NFP

USD/JPY bounces off the weekly low set during the Asian session, as bears turn cautious ahead of the US NFP report due later this Friday. The upside seems limited as the recent slump in US bond yields and hopes of Iran war de-escalation undermine the US Dollar. Moreover, a hawkish BoJ and intervention risks support the Japanese Yen, capping the pair.

Gold loses the grip; $4,000 comes next on the downside

Gold sets aside two daily advances in a row on Friday, opening the door to a potential test of the key $4,000 mark per troy ounce. The precious metal’s retracement follows a decent improvement in the sentiment surrounding the US Dollar, solid NFP data and higher US Treasury yields across the board.

Democrats win House and Senate in US midterms: Why isn’t all bad news for crypto

The biggest story this week was Tuesday’s US midterm elections, which saw Democrats win control of both the House and the Senate in a clear blue wave. This political shift in the US has triggered sharp price swings across the cryptocurrency market.

Week ahead – Inflation and geopolitics in focus as US political landscape shifts

Post-midterm election euphoria fizzles out as risk aversion prevails. US CPI, PPI and Fedspeak on the radar as Fed hike bets remain supported. Oil retreat pauses on mixed hopes about the ongoing conflicts.

US Dollar breaks below 101.50 as Democrats sweep Congress

The US Dollar (USD) comes under heavy selling pressure on Wednesday, with the US Dollar Index (DXY) falling around 0.5% to trade near 101.35 after sliding below the 101.50 level. The Greenback retreats to its lowest level in four weeks as investors reassess the political and economic outlook following the Democratic Party's sweeping victory in the United States (US) midterm elections.