US Federal Reserve Chairman Jerome Powell
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Yield surge triggers market drama

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By Han Tan, Market Analyst at FXTM

  • US futures point to more declines
  • 10-year yields moderating after 1.60% breach
  • Bond market’s message outshining Fed rhetoric for now
  • Gold extends 2021 decline

The surge in Treasury yields sent shockwaves across broader markets on Thursday, with 10-year yields briefly breaking the 1.60% mark to hit a new one-year high before moderating. Early Friday, 10-year yields remained some 40 basis points higher on a month-to-date basis.

The massive ascent in yields is prompting investors to cast serious doubt over their exposure to equities, especially for tech stocks. The Nasdaq Composite index has seen its February gains whittled down to 0.37%, with US equity futures pointing to further declines on Friday.

Asian benchmark indices are ending the month on a downer, while the rising yields are giving reason for the dollar index (DXY) to keep its head above the 90 psychological level for the time being.

The VIX index, also known as Wall Street’s fear gauge also shot above the 30 mark shortly before the US session ended.

 

Markets paying little heed to the Fed narrative

Investors clearly have a hard time buying into the Fed speak insisting that it’s too early to talk about tapering. Despite repeated attempts this week by Federal Reserve Chairman Jerome Powell and other Fed members to reframe the narrative, saying that the rising yields are indicative of a rosier economic outlook, investors are instead interpreting the economic data through the US monetary policy lens.

While cognizant of the Fed’s desire to avoid the same policy missteps following the global financial crisis over a decade ago, markets are of the opinion that improving US economic conditions will cajole the central bank into tightening their policy settings sooner than expected. Fed funds futures are already pointing to an interest rate hike that’s brought forward to the end of 2022, from 2024.

The better-than-expected economic prints released this week, including the weekly initial jobless claims, January durable goods orders and February consumer confidence are only adding fuel to expectations that the Fed will have to bring its tapering plans forward, despite policymakers’ insistence otherwise.

And with President Joe Biden’s $1.9 trillion fiscal stimulus programme still in the pipeline, investors are ramping up the chances of an overheating US economy. They expect this will be accompanied by the desired inflation overshoot, which in turn shortens the runway for the Fed’s eventual policy pullback.

With such a debate raging, we can expect to see more volatile days ahead until markets can reach a greater consensus and a firmer understanding over the Fed’s next policy steps, which should in turn offer a new equilibrium for Treasury yields.

 

Gold set to post second straight monthly drop

Spot gold is on course to register its sixth monthly loss from the past seven, with rising Treasury yields dealing a blow to the non-yielding precious metal. Bullion’s year-to-date losses stand at 7.12% at the time of writing.

Despite the threat of rising inflation, investors are clearly willing to ditch gold in favour of other assets that can better ride on the economic recovery’s coattails, as well as the subsequent overshoot in prices. Gold ETFs have shed their holdings by more than 2 million ounces so far this year.

The bulls have it all to do in attempting to break the precious metal out of its current downtrend, barring any Fed intervention in quelling the surge in yields.

 

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