Yields and US Dollar | The Big Conversation | Refinitiv

TL;DR

Rising US government yields and a stronger dollar are signaling a risk-on environment and potential challenges for financial markets in 2022.

Transcript

Welcome to 2022. At end of last year, we highlighted a few charts that investors should keep on their radar for the next 12 months. U.S. government yields are one of the most important determinants for financial markets. The US 10 year yield is now pushing against critical resistance levels. But is this a response to the policy path that the Federa... Read More

Key Insights

• 📈 Year-end and year-beginning flows driven by rebalancing and window dressing can result in choppy price action, making it dangerous to extrapolate trends for the full year.
• 😮 Rising US government yields and a potential breakout can pose a significant risk to financial markets if they exceed growth levels.
• 💦 Policy divergence and positioning could work against the US dollar in 2022, contrary to common expectations.
• ✋ Higher yields may provide buying opportunities in the tech sector, but such opportunities have been relatively short-lived in the past.
• 🎁 Rising yields in the fixed income market present a clear and present danger, potentially leading to a VAR shock if key levels are significantly exceeded.

Questions & Answers

Q: Why are rising US government yields important for financial markets?

Rising yields can indicate a shift from safe-haven assets to riskier opportunities, affecting asset allocation decisions and potentially destabilizing the global risk environment.

Q: What factors contribute to the weakening of the yen?

The weakening of the yen can be attributed to Japan's retail investors perceiving a risk-on environment and selling yen to invest in foreign assets. Overseas investors, especially hedge funds, also borrow in yen at low interest rates for carry trades into higher-yielding currencies.

Q: How might a breakout in yields affect financial markets?

A breakout in yields that reflects a change in positioning rather than an evaluation of growth itself could lead to unstable global financial conditions. Too rapid of a rise in yields without accompanying growth can be challenging for financial markets to absorb.

Q: What impact might a stronger US dollar have on financial markets?

A consensus for a stronger US dollar in 2022 is driven by policy divergence between the Federal Reserve and other central banks. However, historical patterns show that the fastest expansion of a central bank's balance sheet has resulted in strength in its own currency, suggesting a different outcome for the dollar.

Summary & Key Takeaways

• US government yields are pushing against critical resistance levels, potentially influenced by Federal Reserve policy and year-end flows.

• Asset allocators are positioning for a continuation of the risk-on environment observed in the previous year, with US equities closing near record highs.

• The surge in yields and weakening of the yen suggest a shift from safe-haven assets to riskier opportunities, but a sudden move higher in US yields could destabilize the global risk environment.