Bond Yields Are Rising? Dollar Will Too

While the U.S. equity markets rallied, the U.S. bond market did its best to tell us that economic growth was not going to be what the equity markets expected. Treasury futures held on to that belief as long a they could…until last Friday.

Whether the most recent move in Treasury futures is a correction or the beginning of a new downtrend will only be revealed with time. However, it does present a critical question for investors…

If U.S. bond yields rise what does that mean for the dollar and ultimately U.S. equities?

10 Year Treasury Yield (Click to enlarge)

A quick technical look at the yield on 10 year Treasuries suggests the decline in rates since May may be a correction to the overall uptrend. Using a 100% extension of the Dec 08 – May 09 move we find that the first target for 10 year rates is 5.20%.

The immediate effect of rising rates will be strength in the dollar as investors seek yield.

Disclosure: None

Comments

[jeremiah74:]

rates in the short end are what need to rise to cause people to buy dollars. but thats not to say that wont happen, but i think one needs to keep an eye on the 2yr rates and not the 10

everyone now is in euphoria about a recovery. given the broader picture - debt implosion, savings rate up, employment..etc this does seem like wishful thinking. to me it seems impossible that the developed worls gets away with it all so easily: public money supports growth, while public money remains cheap. you cant have your cake and eat it too.

i think what awaits us will be a sobering up on the equity valuation front and a pain trade in rates, with a rise in yields or a move sideways.

Oct 14 04:56 AM

[ed233:]

I don't know if I go along with your conclusion that everybody will flock to the dollar as yields go up. The reason for my skepticism is that there might be a structural problem with the dollar itself. At present foreign countries holding American securities are presently cashing in for liquidity because they fear there might be a default down the road. What is the benefit from receiving high yields if your principal could be at risk of default. The same thing applies with US real estate. Why buy cheap property when the investor merely saddles himself with huge liabilities in the form of taxes from all levels of government just to hold property looking for a windfall profit that likely diminished over the length of time property is held. The dollar hit a fourteen month low and there is no support as far as the Fed is concerned. In fact even if there was the Fed is now between a rock and hard place where they really cannot do much without weakening the economy further into the abyss. LOL Looking after your money.

Oct 17 06:52 PM