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From the Floor: 10-year bond yields at risk of spiking higher

#SaxoStrats
  • • FX markets showing increased volatility, especially driven by JPY
  • • Possible shift in BoJ policy creates big potential for JPY appreciation: Hardy
  • • US 10-year yield pops above 2.5%
  • • 10-year yields at risk of spiking higher globally: Fasdal
  • • Momentum in crude oil remains strong: Hansen
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By John Acher

The US 10-year yield has popped above 2.5%, boosting the greenback, and bond yields in the 10-year segment are under upward pressure globally and are at risk of spiking higher, Saxo Bank's strategy team says on Wednesday.

"There's been a bit more action in global bond markets," says Saxo Bank's head of fixed income strategy, Simon Fasdal. "First of all the equity rally brings core yields higher, and we now see some spikes in the US and German 10-year."

The 2-yield and 5-year US yields have already for some time told a story of higher yields, so focusing only on the 10-year would be misleading, as the 10-year and 30-year yields have been under pressure for some time.

"There is pressure in the pump, and something is clogging the pipe, and I will not compare this to Deepwater Horizon, or anything else, but simply tell you that we might see a sudden spike in the 10-year sector on a global scale," Fasdal says.

FX volatility awakens

We are getting a lot of volatility in FX finally, especially driven by the Japanese yen,” says Saxo Bank’s FX strategy chief John Hardy.

The Bank of Japan’s balance sheet shrank in December, despite the bank’s policy, and yesterday’s news that the BoJ is lowering purchases of longer JGBs, and that “has the market smelling out an eventual shift in the bank’s policy in a hawkish direction and unwinding accommodation,” Hardy says. 

A follow-up and an actual shift in policy would have a big impact.

“There’s very, very large potential for Japanese yen appreciation,” Hardy says, adding that the BoJ “hates volatility” so it will try to do all it can to lean against the market.

EURJPY
Source: Saxo Bank 

With the US yield above 2.5%, which was a key level in gold bond yields going higher, and the 10-year JGB yield creepijng back to 10 basis points, which earlier forced the JoB to carry out unlimited purchases to keep the curve under control, Japanese bond yields are at an important juncture. “So keep an eye on JGBs at the 10-11 basis points level,” Hardy says.

Meanwhile, the momentum in crude oil prices remains strong, says Saxo Bank's commodities strategy chief Ole Hansen. The 2015 high in WTI crude oil was broken yesterday.

"The market at the moment is in a bullish stage, focusing on bullish news," Hansen says.

Brent bulls are looking for a test at $69.65/barrel ahead of $71.40/b, Hansen says. Wednesday brings fresh oil inventory figures from the EIA.

In the equities markets, Asia had a mixed session, with the Hang Seng up and some pressure in the Nikkei on Wednesday.

“Our main these is for a retreat here in equities in Q1,”says Saxo Bank’s head of equities strategy Peter Garnry, noting that the US quarterly earnings season begins next week.

John Acher is a consulting editor at Trading Floor.

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