The bond market has seized the market’s undivided attention after a watershed day yesterday in which the long end of the US curve suddenly came unglued, with US 30-year yields breaking a massive chart point at 3.25% - the highest level in over four years.
For perspective, this is the first time the longest US yields have posted a four-year or longer high since the early 1980s, so it is worth taking notice when something unfolds for the first time in over a generation.
The move has violently changed the plot and represents a strong risk for risk appetite if the move as risky assets, whether equities or emerging market currencies, look poorly positioned for this development and a further rise in yields could slam the brakes on the recent attempts to don rose-tinted glasses in emerging markets and elsewhere.
Driving the move higher in US yields was the triple whammy of the key breakout levels growing nearer in both the 10- and 30-year maturities, a 20-year high in the US ISM non-manufacturing survey in September, and comments from Federal Reserve chair Powell, who made many off-the-cuff comments that spooked the markets, especially his loose talk of the next crisis and what it may or may not look like (“… maybe it will surprise is and looks just like the last one”).
As well, Powell discussed again the dropping of the language in the Federal Open Market Committee statement describing Fed policy as “accommodative”, and indicated in a somewhat surprising turn of phrase that he felt the FOMC rate was “a long way from neutral”. Yikes! This is refreshing candor from the Fed, though the market may not feel that way. The US data and Powell’s comments were good for pricing in an additional 10 basis points of Fed hikes through the end of next year relative to where they were at the Tuesday close.
The drastic move higher in US yields is pressuring bond yields higher the world over and Japan is no exception, the Bank of Japan’s yield-curve-control policy notwithstanding. Note that the 10-year JGB traded above the assumed cap (15 basis points) and above 16 bps overnight while longer-dated JGBs have moved in synch with the rise in yields elsewhere, and the 30-year is approaching 100 basis points for the first time since early 2016.
If the BoJ blinks on its commitment to the 10-year and we get a downdraft in risk assets, risks would point to a strong JPY rally while calmer risk assets and a further rise in yields, together with a signal from the BoJ that it is doubling down on commitment to YCC, is needed for USDJPY to pull above the big 114.50 resistance and to 115.00 and beyond.
Volatility risks are asymmetric for downside in JPY crosses, especially outside USDJPY.
The break of 1.1500 is critical here in EURUSD and significant if the pair can’t engineer a reversal well back above that level ahead of the weekend. Earlier,we suspected that the euro might have a chance to put up a fight if both US and European yields are on the rise at approximately the same rate, but such a forceful move in US yields in relative terms is too high of a hurdle at the moment. Watching the status of the 1.1500 level through this week’s close, as the pair is vulnerable to the downside as long as it remains clear below that level into the 1.1300 lows and even down into the 1.10-1.12 area.