Daily Market Comment – Yields creep up ahead of Powell; stocks slip, dollar firms



  • Fragile risk sentiment as yields rise again, sending shares on Wall Street skidding
  • Powell speech in focus as bond volatility sparks speculation of ‘Operation Twist’
  • Commodity currencies fend off stronger dollar but euro and pound struggle

Rising yields causing headache for the Fed

The rout in bond markets is far from over as the selloff that had subsided somewhat earlier in the week accelerated again on Wednesday, pushing global yields higher. The US 10-year yield came within a whisker of hitting 1.50% while Australia’s jumped to 1.80%. Although it’s a little calmer today and yields are slipping back slightly, it’s clear that investors are not done dumping government bonds. But the bigger problem is that central banks are unsure yet as to how to respond to these jitters.

The consensus within the Fed is that higher yields are a sign of a healthy economy and financial conditions have not tightened very significantly. This is true when looking at real yields, which have only climbed to June 2020 levels. However, if policymakers are unable to calm markets and yields continue to surge, a sharper tightening in financial conditions will begin to bite for corporations and make it substantially more costly for the government to borrow at a time when it is planning on issuing a record amount of debt.

As Chair Jerome Powell prepares to deliver his final remarks before the Fed’s blackout period begins ahead of the March 16-17 policy meeting, speculation is growing that he will use today’s event to signal some action in the bond market. Powell is due to speak at an online Wall Street Journal jobs summit at 17:05 GMT and although it’s not very probable that he will announce a policy shift, he could sound more concerned about the spike in yields than he did in his last appearance.

The question is, will jawboning be enough to put a lid on Treasury yields or will the Fed eventually be forced to conduct another ‘Operation Twist’ like it did in 2011 whereby the central bank sells short-dated Treasuries to buy longer-dated ones to flatten the yield curve.

Stocks spooked again by higher yields

Despite the slight pullback in yields today, major stock indices around the world were mostly in the red, with shares in China, Tokyo and Hong Kong slumping by more than 2%. Today’s losses come after Wall Street failed to rebound yesterday. The S&P 500 (-1.3%) and Nasdaq Composite (-2.7%) both dropped sharply for a second consecutive day. However, futures were recovering from earlier lows and may yet turn positive as European stocks fell only modestly at the open.

But it’s not just the bond market that equities are keeping an eye on as President Biden’s stimulus package appears to be facing a few hiccups in the Senate. The Democrats and the White House have just reached a deal on narrowing the eligibility for the $1,400 stimulus checks while there’s been a delay to when the Senate will begin debating the bill.

Dollar prevails, loonie eyes OPEC decision

The weaker risk sentiment nudged the US dollar higher on Thursday, though the yen and Swiss franc were broadly down, suggesting the anxiety about surging yields was confined mostly to overstretched stock markets. The greenback advanced against the euro and pound as well as versus the yen and franc, with its index last up 0.27%. But it fell back against the commodity-linked dollars, which benefited from the increasingly bullish outlook for commodities.

The UK budget announced yesterday was unable to lift sterling above $1.40 as there were few surprises. The loonie meanwhile hovered around C$1.2650 per dollar as investors awaited the output decision by the OPEC+ club of oil producers. Reports that OPEC+ may decide not to raise output in April after all supported oil prices. WTI oil was last trading above $61.00 a barrel and Brent crude was trying to cling on to the $64 level.

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