USD 8217 s Response to Bond Yields

The main message from Bernanke speech is that a trimming of asset purchases later this year can be achieved without significantly boosting bond yields. “Tapering is far from Tightening”. That’s also the title of our Monday piece.

Chairman Bernanke’s insistence to talk down yields yesterday by highlighting the ability to maintain accommodation despite a tapering of purchases, may have been in reaction to last week’s speeches from the ECB’s Draghi and BoE’s Carney. Well aware that US 10-year yields stood at 2-year highs and the US dollar index hovered at 3-year highs, Bernanke’s aimed at preventing any sharp divergence in US interest rates from that of the more activist central banks.

Traders’ knack to overreact re-emerged in full force as they sold the US dollar shortly upon the release of last month’s FOMC meeting. The minutes revealed that some FOMC members wanted “more evidence that the projected acceleration in economic activity would occur before reducing the pace of asset purchases”.

The minutes were interpreted to be more dovish than Bernanke’s post-FOMC meeting press conference, which shocked the world by indicating that the tapering of asset purchases could begin as early this year and may end altogether by June of next year.

Yet, we have little choice but to pursue the hawkish interpretation and to anticipate the tapering of asset purchases to start in autumn when the minutes state the following the remark that: “A number of Fed officials wanted to end the central bank’s $85 billion per month bond-buying program late this year.”

Highest USD-Yields Correlation in 5-Years

Until yesterday, US 10-year yields hit 2-year highs and the US dollar index reaches 3-year highs. The charts below highlight the evidence that rising rates were starting to matter in boosting the US dollar. The daily correlation between the US dollar index (basket of 6 currencies) and yields on the US 10-year government note has risen to as high as 0.67%, the highest level since 2008. The correlation uses a 30-day rolling basis. The 85.0 and 3.0% levels shall become the values to take out by the US dollar index and the 10-year note as long as the US unemployment rate remains on the path towards 7.0% this summer.