Bond yields heading higher again
We start the week with 10Y US Treasury yields back above 1.5%, which we haven’t seen since the beginning of June. The driver for this may be some more positive news coming out of US Congress on the possibility of an infrastructure spending plan, where there appears to be the kernel of a deal.
This is much smaller than the spending figures talked about earlier this year. Bloomberg is mentioning a $579bn spending plan, which is well down on the $2tr figures being bandied about before. This plan omits the corporate taxation and social spending plans the original version put forward by President Biden. So it’s not the full package, which is one reason it is much smaller.
If this package does get through, then it could provide some boost to real bond yields, which have been depressed since March. Though it’s worth noting that this is not the reason that Treasury yields are higher today. That owes more to a pick up in inflation expectations – for which I can see no obvious catalyst other than the usual slow lagged adaptive response of expectations to actual inflation.
The other thing that could see real yields moving this week is the US labour report on Friday. Consensus is paring its expectations down from million-plus figures last month to 700K now. Our house forecast is even more subdued at 550K – much the same as last month. If we are closer to the mark than the consensus, then the recent spell of 10Y yields back above 1.5% could prove short-lived. But then again, this is payrolls, where anything could happen, so you can’t rule out some upside surprise too.
Any spike higher or lower in 10Y US Treasury yields will provide some volatility in Asian markets. The link between rising US yields and the USD FX rates is currently a weak one. But that said, exogenously rising yields will tend to stifle risk asset markets and that is likely to put Asian FX under a depreciating trend, and vice versa if yields dip. This is one of those occasions where good news is bad news for markets. That would tend to hit the weaker economies in the region hardest (THB, MYR), though as the region’s proxy currency, the KRW would likely lead any move (higher or lower).