A new topic has appeared on the map of market events, and it is getting louder. We are talking about falling US bond prices and rising yields (as we wrote on 8 January).
The yield on 10-year US bonds rose to 1.16% this week, the highest level since March. This was after the biggest weekly rise in yields since June, amid investor expectations of increased federal spending to help the ailing US economy. President-elect Joe Biden promised Friday to deliver a massive stimulus package worth trillions of dollars. He did so after a jobs report showed that the number of jobs in the U.S. economy fell by 140,000 in December, contrary to market expectations of a 71,000 increase.
Yields on 30-year or 10-year bonds seem to be rising the strongest. As a result of the growing debt interest rates, together with the chances for a quick rebound in the US economy (which is also expected by the US Federal Reserve), the US dollar may also gain in value. Although today the EUR/USD pair seems to be correcting its recent three-day declines, this quarter it seems that the US currency still has a chance to strengthen further. Morgan Stanley, thinking that the correction may be stronger, exited a long position on EUR/USD and a short position on USD/CAD, traders cited by Bloomberg reported.
A stronger dollar isn't preventing crude oil from rising again. WTI crude futures traded near USD 53 a barrel on Tuesday, their highest level since February 2020, as U.S. crude inventories fell for the fifth week in a row. The price rise also seems to be driven by Saudi Arabia's oil production cuts and hopes for a faster economic recovery in 2021.
It also seems that a good outlook for GDP growth in the second half of 2021 is helping to keep equity markets elevated. Despite the current severe economic restrictions and prolonged tightening, as well as increased infections, hospitalizations, and new outbreaks of COVID-19, the equity market appears to remain strong. Against the backdrop of falling U.S. bond prices, it is worth noting that in a similar trend reversal in the second half of 2016, the S&P 500 Index rose about 40 percent as capital may have flowed from bonds to equities.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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