Bloomberg / New York
President Joe Biden’s $1.9tn relief plan, plus the prospect of more stimulus later this year, is setting the stage for a shift away from historically low Treasury yields that’s likely to lead to a pickup in volatility in currency markets.
US yields have marched higher even before the plan’s arrival – offering an inkling of what may be in store. BlackRock Inc sees as much as $2.8tn in additional fiscal spending this year and the risk of a further rise in long-term rates. BNY Mellon’s John Velis says a 2% 10-year Treasury yield is possible by April as part of a “tantrum without the taper” of Federal Reserve bond purchases. And volatility in currencies is so low that it’s all but certain to go up, says Harley Bassman, creator of a widely watched gauge of Treasury-market movements.
For weeks, the million-dollar question for many investors was whether the $1.9tn relief plan would flow mainly through financial markets – as the first package did – or actually find its way more into the US economy, where it could trigger changes in spending and investment magnitudes greater than the original size of the stimulus.
The wave of reflation bets sweeping through global markets indicates the latter narrative is taking greater hold, suggesting such trades may have room to run. “There’s a lot of stimulus in the pipeline that could add up to $2tn to $3tn in the end,” Velis, an FX and macro strategist at BNY Mellon, said via phone. That includes another package later this year focused on infrastructure and growth, he said.
Yields began to inch their way higher in January after Democrats appeared poised to win control of the Senate, sending the 10-year above the previously elusive level of 1%. The rate, currently around 1.37%, is now at its highest level in almost a year.
But the moves higher in yields weren’t accompanied by corresponding reactions in the foreign-exchange market, which has largely remained steady.
One gauge, for instance, is the CBOE EuroCurrency Volatility Index, which tracks near-term projected volatility of the euro-dollar exchange rate.
It has been on a mostly downward trend in 2021, hovering not far from the lowest levels of the past 12 years. Rising rates are the first place that stronger growth and inflation prospects are reflected and that’s set to be followed by currency volatility. One place to watch is the yen, which has one of the lowest implied FX vols among the major currencies, and has “more room to rise,” Velis says.
Meanwhile, he sees the dollar’s next direction as “somewhat ambiguous.”
At BlackRock Inc, the world’s biggest money manager, fresh fiscal spending is seen as “turbocharging the restart” of the pandemic-stricken US economy, with further spending only ensuring more support, according to a note by Jean Boivin, head of the firm’s research arm, and others. They see a key risk of a further increase in long-term yields “as markets grapple with an economic restart that could beat expectations,” which could spark bouts of volatility. They downgraded their view on government bonds, while broadening their pro-risk stance that includes favouring stocks.
Implied volatility across a wide range of financial instruments is currently “mis-priced and too low,” said Bassman, inventor of what’s now known as the ICE BofA MOVE Index, Wall Street’s most widely watched benchmark for interest-rate volatility.
LEAVE A COMMENT Your email address will not be published. Required fields are marked*
Consumer prices in US advance by most in nearly nine years
SPAC boom faces new SEC threat with accounting crackdown
Singapore’s Grab to list in US in $40bn SPAC deal
European stock markets defy vaccine woes to close higher
China’s robust exports and surging imports boost economic recovery
Ant Group to become financial holding firm in overhaul
MUSIAD is keen to help develop and promote SMEs in Qatar, says official
Local retail investors, Arab funds remain bullish on QSE