A further rise in the 10-year yield toward and beyond 5% would keep the dollar supported. That matters most for USD/JPY, which is already near the 160 area where Japan has stepped up verbal warnings . Higher long-end yields would also weigh on gold, which has slipped below $4,000, and add pressure on richly valued tech stocks already hit by the Nvidia leadership shock. Oil is the key risk to the call. A sustained fall in crude would ease inflation fears and could cap yields, while a renewed rise linked to the Iran war would reinforce the move higher.
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Cheaper oil might give Treasuries a breather, but CBA thinks growth and a hawkish Fed will keep pushing the 10-year yield higher.
Summary:
CBA’s Chambers says US Treasury yields have room to rise further
Yields jumped after a hot October CPI report and hawkish comments from Fed officials
Markets have largely priced in a December Fed hike
A sharp fall in oil prices may temporarily halt the rise in yields over the coming weeks
Chambers expects economic momentum and firmer Fed hike expectations to dominate, pushing the 10-year yield higher
US Treasury yields have further room to rise, even if the recent slide in oil prices slows their advance in the coming weeks, according to Commonwealth Bank of Australia rates strategist Chambers.
Yields have climbed sharply this week. A hotter than expected October inflation report, with consumer prices up 0.4% on the month and core prices up 0.3%, pushed the 10-year yield up 11 basis points to close to 5% on Tuesday. Hawkish comments from Federal Reserve officials added to the move. Governor Christopher Waller raised the idea of a 50 basis point hike in December, and Dallas Fed President Lorie Logan said she favors at least two more quarter-point increases. Markets have largely priced in a December hike.
Chambers is watching two forces pulling in opposite directions. Oil prices have dropped sharply, which eases inflation concerns and could act as a temporary brake on yields. But he expects economic momentum and firmer expectations of Fed tightening to win out, pushing the 10-year yield higher in the near term.
That view fits a broader shift in bank forecasts this week. Deutsche Bank now expects quarter-point Fed hikes in December, January and March, while UBS sees hikes in December and March and has flagged the risk of a faster pace. If more forecasters move toward back-to-back hikes, longer-dated yields would have to adjust higher to reflect a higher expected path for policy.
Oil remains the main risk to the call. Crude has been volatile. Brent dipped below $90 a barrel earlier this week, then rebounded as attacks on shipping continued during the Iran war. A sustained fall in energy prices would weaken the inflation argument for further hikes, while a renewed spike would strengthen it.
For now, the balance looks tilted toward higher yields. That would keep the dollar supported and add pressure on assets that are sensitive to rates, from gold to richly valued technology stocks.
This article was written by Eamonn Sheridan at investinglive.com.
