Global 360 . US Treasury yields surge on inflation expectation and stimulus

It was neither the currencies nor the equities but the US Treasury yields that drew the market’s attention in the past week.

The US 10-Year (Yr) Treasury yield rose sharply last week especially at the far-end (10Yr and 30Yr). The 10Yr yield surged 13 basis points (bps) and closed the week at 1.34 per cent. The 30Yr yield closed at 2.13 per cent, up 12 bps for the week.

Rising inflation expectations and hopes for a bigger stimulus in the US led the yields higher. Rising yields took the sheen off gold. Currencies and equities remained relatively stable last week.

The drivers

Expectations that the US inflation will rise and pave the way for the US Federal Reserve to increase the interest rates, and hopes for more stimulus were the major drivers for the yields to go up.

The US 10-Year Breakeven Inflation Rate — a measure that indicates where the market expects the inflation to be in the next 10 years — rose to 2.24 per cent earlier last week.

However, the rate came down thereafter, and is currently at 2.14 per cent. US Treasury Secretary Janet Yellen has insisted on having a large stimulus package to help the economy recover.

While US President Joe Biden’s new $1.9-trillion stimulus is in the process of getting approved, Yellen’s statement last week has left the hopes open of more help from the government.

Room to rise

The US 10Yr yield has risen past a key resistance zone of 1.20-1.25 per cent. The view of seeing a reversal from this resistance zone, mentioned last week, has got negated.

As long as the yield sustains above 1.20 per cent, the outlook will remain bullish.

A further rise to 1.50 per cent and 1.60 per cent is possible in the coming weeks.

Yields to support dollar

Rising yields can support the US dollar and push the greenback higher. The US Dollar Index (90.34) rose to test 91 initially last week but gave back all the gains thereafter to close the week slightly lower.

As mentioned last week, 90 is an important support. The dollar index can continue to sustain above 90 for now on the back of the rising yields. A sideways range of 90-91.50 can be seen in the near term.

But on the charts, the bias is negative, which can lead to an eventual break below 90 on the dollar index. Such a break will drag the index lower to 89-88 over the medium term.

Data on the US Consumer Confidence, GDP and Personal Consumption Expenditures (PCE) Price Index, to be released this week, can impact both the dollar and the yield movement.

Dow stabilises

The Dow Jones Industrial Average (31,494.32) remained stable and oscillated around 31,500 all through last week. The near-term outlook is mixed. A rise to 32,000 is still possible.

But from a bigger picture, the level of 32,000 is a strong resistance that can cap the upside and trigger a reversal.

The 31,000 level is an immediate support, and 30,000 is the next important one. A decisive fall below 30,000 will indicate that a corrective fall has begun and a top is in place.

Euro to consolidate

The euro (1.2118) fell sharply from a high of 1.2170 earlier last week.

However, it managed to recover from a low of 1.2023 towards the end of the week. The support is at 1.20 and the resistance is at 1.22.

As mentioned last week, the euro can oscillate sideways between 1.20 and 1.22 for some time. A breakout on either side of 1.20-1.22 will determine the next direction of the move.

Rupee near crucial resistance

The rupee witnessed a short-lived fall, breaking below 72.75, last week.

The currency made a low of 72.92 and recovered sharply to close the week at 72.65. Indeed, the currency extended the rise to 72.50 in the off-shore market on Friday.

The 72.50 will be an important resistance to watch this week. A break above it can take the rupee higher to 72.30. On the other hand, inability to breach 72.50 can keep it in a narrow range of 72.50-72.75 for some time.

The writer is a Chief Research Analyst at Kshitij Consultancy Services