Traders betting that interest rates in the US will remain higher than inflation far into the future drove 10-year real yields to a 14-year high and spurred gains for the dollar against some of its major peers Monday.
(Bloomberg) — Traders betting that interest rates in the US will remain higher than inflation far into the future drove 10-year real yields to a 14-year high and spurred gains for the dollar against some of its major peers Monday.
The real — or inflation-protected — yield on 10-year Treasury debt climbed more than 6 basis points to 1.84% in late New York trading, the highest level since 2009. The allure of positive returns is drawing investors to the greenback, which has rallied about 3% from a more than one-year low last month.
Nominal Treasury yields also climbed, with the 10-year rate briefly exceeding 4.21% for the first time since November, as traders pared expectations for Federal Reserve interest-rate cuts next year. The latest push higher in long-dated yields will increase US mortgage and corporate borrowing costs and, in turn, slow the economy.
“From an economic perspective, the longer inflation-adjusted borrowing costs stay this high, the more material the fallout will be on both corporate and consumer behavior,” Ian Lyngen, head of US rates strategy at BMO Capital Markets, wrote in a note.
The dollar reached its highest level against the offshore yuan this year and strengthened to 145.58 yen, approaching an exchange rate that motivated the Bank of Japan to intervene last year to bolster the yen.
“It is hard for the dollar to go down meaningfully when the market is focused on either US outperformance or higher US yields,” wrote Goldman Sachs strategists including Kamakshya Trivedi.
It’s a new paradigm for the dollar, which until recently was widely deemed to be running out of steam. Even as the Federal Reserve approaches the end of its tightening cycle, the currency can benefit from resilient economic growth, the thinking goes.
The moves are being accentuated as hedge funds continue to trim short positions in the greenback. A barometer of market positioning and sentiment in the options market shows investors are the most bullish on the currency since late March.
Meanwhile, several policymakers are insisting there is more work to do to get inflation back below target. A recent surge in natural gas and crude oil prices has highlighted inflationary risks, while a surge in debt issuance is weighing on the market.
Even one-time bond king Bill Gross said US debt was “overvalued” and estimates the fair value for 10-year Treasuries is 4.5%.
Monday’s rise in nominal yields was led by short-dated tenors, and occurred as several large financial companies lined up corporate bond offerings.
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Data from the Commodity Futures Trading Commission last week showed shorts on the greenback retreated to the lowest level in eight weeks.
“Real rates in the US are very attractive globally, and it can only be a movement of the herd which suggests that shorting the dollar was a really productive venture at this point,” said Peter Chatwell, head of global macro strategies trading at Mizuho International Plc.
–With assistance from Vassilis Karamanis, Anchalee Worrachate, James Hirai, Neha D’silva, William Selway, Michael Mackenzie, Mark Tannenbaum and Elizabeth Stanton.
(Updates yield levels. A previous version of the story was corrected to fix this year’s high in the 10-year nominal yield.)
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