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Why Impact on USD of Surge in Treasury Yields Might be Limited

Why Impact on USD of Surge in Treasury Yields Might be Limited

Martin Essex, MSTA, Analyst

USD Talking Points:

- US government note and bond yields rose sharply Wednesday after Bloomberg reported that China may halt its purchases of US Treasuries.

- The USD fell in response but the effect on the currency could be limited as no final decision has yet been taken and China has already cut its buying substantially.

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The US Dollar weakened Wednesday after the Bloomberg news agency reported that China may halt its purchases of US Treasuries. The yield on the benchmark 10-year Treasury note was nearly five basis points higher at 2.588% in early US trading, helping weaken the US Dollar Basket (DXY) to 91.52 from 91.80 when the report was published.

That reflected market jitters that prompted a move into safe-haven currencies like the Japanese Yen and the Swiss Franc.

USD Basket Price Chart 5’ Timeframe (January 10, 2018)

Why Impact on USD of Surge in Treasury Yields Might be Limited

Chart by IG

While the 5bp rise in the Treasury note yield was the principal move, 10-year yields were also up elsewhere. The yield on 10-year German Bunds was up 2bp at 0.476% and the yield on 10-year UK Gilts was 1bp higher at 1.297%. The 10-year Japanese Government Bond (JGB) yield bucked the trend, trading flat at 0.087%.

US 10-Year Treasury Note Yield Chart 5’ Timeframe (January 10, 2018)

Why Impact on USD of Surge in Treasury Yields Might be Limited

Sovereign bond yields rose globally after news Tuesday that the Bank of Japan had cut the amount of government bonds purchased, casting the spotlight again on the likelihood that central banks from Japan to the Euro-Zone may begin to trim their monetary-stimulus policies this year.

However, there is little new in this; a withdrawal of monetary stimulus has been expected for some time. Moreover, the Bloomberg report noted that so far officials have simply recommended slowing or halting purchases of Treasuries – it is not yet clear whether this been adopted as policy.

Moreover, Chinese net purchases of Treasuries have already slowed significantly so the impact on USD will likely be less than if the report had been totally unexpected.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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