10-year yields off lows earlier today to keep little changed around 1.70%
The low for 10-year yields hit 1.677% earlier but have since bounced to 1.704% currently.
That has helped to also provide some base for the dollar following yesterday’s decline, despite more upbeat US economic data in recent days.
There seems to be a short-term ceiling around 1.75% but there is also arguably a soft bottom closer to 1.60% and that may be the range that we are playing around with.
As such, it suggests the path of least resistance is still likely for a move higher in yields and a steeper yield curve; all things considered.
The market is starting to price in a Fed rate hike for December 2022 but we are still more than 20 months away from that. A lot can change in the meantime.
There is still virus and vaccine dynamics to consider, alongside gauging the transitory nature of upcoming inflation pressures, adding to measuring the pace of the economic and labour market rebound – not to mention the Fed’s tolerance to all of that.
The bond market has a knack for getting ahead of itself in terms of pricing in moves by the Fed. We’ll see if this time around is any different from previous cases.
That said, unless there is major setback to the global economic outlook, I doubt that any rally in bonds i.e. lower yields will be sustained for too long (other than a correction move).
Looking to risk assets, the longer yields face a stall, I would argue that’s quite a comfortable environment to thrive since the Fed is still pressing the QE button.
As for the dollar, there’s a built-in support system as long as real yields in the US keep higher. But amid growing optimism in the global outlook, there’s still room for some push and pull until we get to the point where the Fed begins to consider tapering.