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US Yields Continue Their Ascent

October 4, 2023

There is not much joy for risk-assets at the moment. Bond yields have continued their ascent, in a move that reflects expectations that higher interest rates are here to stay for a while. Higher energy prices and a tight jobs market are both avenues by which inflation could stick around longer than central bankers and the public at large would like. The upshot of this is that in the current environment, equity markets are facing a very substantial hurdle in the form of soaring bond yields.

This is because bond yields and equity markets tend not to rise in tandem. We are seeing this scenario play out now, with the 10-year yield on the march and perhaps even fancying a run towards the 5% level. Currently the 10-year note is hovering around a 4.8% yield, and this has markets skittish. High bond yields are serving as an inconvenient reminder of tighter monetary conditions, conditions which don’t bode overly well for either corporate sector or broad economic growth. As such, bond yield momentum is likely to dictate the fortunes or otherwise of other assets in the short term at least.  

US job openings data reflected the tightness that has been inherent in the labour market in 2023. This is what triggered the latest step higher in yields. With the focus on how a strong jobs market may force the Fed’s hand when it comes to tightening rates further, there could be a lot riding on the non-farm payrolls report due for release on Friday.  

In FX markets, the USD continues to reign supreme courtesy of ascending treasury yields. The interest rates on offer in the US is keeping the greenback in demand, which is why the DXY has hit the 107 level this week. Meanwhile, the USDJPY price action has strongly suggested that the authorities in Japan have stepped in to support the floundering Yen. The USDJPY had a brief look above the key 150 level before staging a quick retreat. Comments from Japanese officials have also hinted that coordination regarding intervention may have been reached with their US counterparts. However, the BOJ have not confirmed or denied direct intervention.

The Aussie Dollar is again in the doldrums, with the currency unable to mount a move higher in the face of ongoing greenback strength. Risk aversion has also been hitting the AUDUSD rate, while the ‘hold’ by the RBA on Tuesday also did little assist the AUD. The statement from the new RBA Governor Bullock did not deviate much from that of her predecessor. Though a tight jobs market and rising energy costs do keep a further hike in play over the coming months. The AUDUSD rate was last seen trading just above the 0.63c level.  

Gold remains on the ropes due to rising bond yields. The precious metal continues to lose-out on a yield perspective, while most safe haven flows are heading in the direction of the USD rather than to gold. Spot gold was trading around $1822 on Wednesday. Gold will likely need to rely on yields and the USD coming off the boil if it is to make any sort of forward progress in the near future.  

Elsewhere, oil has been dented this week by USD strength and concerns about what a prolonged high-interest rate environment may mean for demand. However, supply constraints could limit downside potential for oil in the near-term. Attention will be on an OPEC+ meeting this week as well as upcoming data on US crude oil inventories.  

Overall, all eyes remain on bond market moves with investors worried about how high interest rate environments will impact growth prospects. Yields and risk-assets will remain sensitive to any US economic data releases which could change FOMC rate expectations.  

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