Bond yields are moving in extraordinary ways but not necessarily helping with currency forecasting

Outlook

Yesterday the manufacturing PMI was excellent and the dollar fell anyway. The ECB is firmly expected to cut interest rates (again) in June, and the euro rose anyway.

Everybody and his brother is watching bond yields that are moving in extraordinary ways but not necessarily helping with currency forecasting. In Japan, for example, long-term yields are rising. The 10-year is about 1.56%, almost the highest since 2008, while the 30-year JGB is up about 35 bp and nearly to the level of the equivalent Bund. The 40-year is up over 90 bp for the 7^th week and closing in on 3.55%.

But the forecast for the BoJ rate hikes is not until later this year, perhaps very late. This is not the BoJ dragging its heels on confusion over the data but almost certainly an unwillingness to respond until the US trade war is clearer. In other words, uncertainty.

Reuters says “global investors are flying blind in markets roiled by erratic US trade rhetoric and chaotic economic forecasting… placing long-term bets is harder now than at any time since the 2020 Covid crisis.”

Fed Gov Waller pointed out that “if there is some clarity on the tariff front, it might allow interest rates to come down in the second half of the year.” No kidding.

We have several weeks to go before the Senate votes on the new budget bill, but the bond market is voting with its feet. This may be because it’s unlikely the Senate will reject the bill in its entirety, although it may balk at some cuts. They will want to avoid another government shutdown in early August when they would rather be on vacation than debating finances. The delay is not offering any respite. 

The word for the bond market yesterday was “choppy.” Prices were holding their own until the US came in Yesterday, but then all hell broke loose. The yield had been as low as 4.579% overnight, but jumped to 4.613% by 8:36 am, then fell again. Very messy. . The new 20-uear bond had been awarded on Wednesday at 5.047% but rose to 5.16% yesterday morning. The 30-year went to 5.154% vs 4.96% at the close on Tuesday. We never pretend to understand the bond market but apparently these are big moves.

Flash in the pan? We get new auctions next week of 2, 5 and 7-years. Our favorite bond commentator says these sales “will be another reminder that ‘supply is never a problem until it is.’” Bottom line, the bond universe disapproves of the additional supply arising from the new budget in an already overcrowded market. Heaven only knows what the Fed will do with its dismantling of QE.

As an aside, a ray of light from the Supreme Court, which ruled Trump can’t fire certain federal employees. It came right out and said this applies to the Fed, too—which it didn’t have to do. The wording: "The Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks." So, if the law sets up an institution and the Congress funds it, presidential hands off. We are not so sure Trump won’t challenge this.

The world is worried about a lack of demand for sovereign debt, and not just in the US. Analysts everywhere are noting the rise in yields just about everywhere. In the UK, the 30-year gilt yield is higher than during the Truss crisis. Bloomberg’s Authers points out Austria has a “century bond” (ending 2120) whose yield has gone from 0.75% to 3% over the past 5 years. Japan takes the prize—the 10-year hit over 1.55% yesterday, nearly to the 2008 level. As of yesterday morning, every country’s yield tracked by Trading Economics had increases—except Russia and Switzerland.

One analyst says the JGB is as important as the American fiscal position. It’s an old joke to blame Japan for outlfows and neglect to credit Japan for inflows, but this guy says “watch the JGB.”

Forecast

The markets are in a slow boil. Yields have retreated so far today, but the big moves are a warning, and so is the choppiness of the moves. It would not be surprising to see central bank intervention in some places to stabilize prices.

As we predicted, Trump needs desperately to be in the limelight so early today issued a new 50% tariff on the EU and a 25% tariff on imported cellphones. This is almost unbelievably stupid, especially on a holiday Fridy, except it’s Trump and that’s what we have come to expect. It’s the exact opposite of what Fed Waller advised—clean up the tariff table and financial conditions will improve. So far in the first 15 minutes, equity index futures dropped some more. We await the bond market response.

Because of the holiday, markets close early today and will be closed entirely on Monday. We can see no reason for the dollar to recover any lost ground but we could still see some position-squaring, so caution is called for.

Tidbit: Let’s face it—Bloomberg is a leader in financial news and analysis, but more than a little impressed with itself. Its own dollar index varies from the standard futures DXY. To be fair, the Fed has a dollar index, too.

In a nutshell, the Bloomberg version has more currencies (10 vs. 6 for DXY, including emerging markets). It adjusts the weights in order to reflect trade and liquidity. Heaven only knows how they do liquidity. DXY has fixed weights. Finally, Bloomberg uses geometric means instead of the arithmetic in the DXY.

We had to look it up: Google reports “The arithmetic mean is the sum of values divided by the count, while the geometric mean is the nth root of the product of n values.” Sorry we asked.

We tried to line up the charts as close as possible to the starting point.  They all look more or less the same, except the Fed version has an upward sloping support line instead of the horizontal in the BBDXY and DXY. As far as we can tell, the Fed version shown here is plain old arithmetic and not adjusted for anything—just nominal rates. The Fed also has an index comprised of “advanced” country currencies and it’s nearly identical to the DXY.

It used to have a trade-weighted version but that was discontinued, which tells you everything you need to know about the effect of trade balances on currencies to real economists who are not working in the current White House. 

So what? Critics have said for decades that an index combining things as disparate as the UK and Japan is without merit. If you could adjust each currency for inflation and re-calculate every month, that might be useful. Or GDP per capita. Or adjust each one for yield, although it’s tricky whether for short-term or long-term.

Bottom line, we all use the dollar index because it’s all we have. It’s a terrible indicator, indicating almost nothing except what analysts chose to make of it, like Bloomberg’s dividing line (that Trading Economics offers, as well).

Let’s assume the dollar breaks what is taken as a support line. The “breakout” will be interpreted as meaning a further decline is in the cards. Well, no. technical indicators have very little forecasting capability, if they have any at all, and lines like these have none.

But that doesn’t mean crossing the line will not have a big effect on sentiment and traders will seek out the data that confirms the bias set in motion by the breakout.

Tidbit: The WSJ has a front page story on banks working on getting into the stablecoin racket out of fear of losing deposits. Essays on how wonderful “stablecoin” will be for the US are doing the rounds.

Hold on. A quick look at basics delivers a ton of worry. The problem is twofold—first, money is Trust. Everyone is required by law to accept dollars in the US and to pay for goods/services with money, including taxes. A lot depends on whether “stablecoin” will have the same backing and capability. If it does, it’s money supply like money today.  Since buyers have to deliver regular money to buy stablecoins, the initial impact is to reduce the real money supply for daily transactions and presumably also purchases of equities and other assets. The banks are right to be worried about their deposits. How will it work to pay for goods with stablecoin—all electronic, of course. Jobs for computer guys.

Second, assuming the Treasury is stupid enough to accept stablecoin to purchase Treasuries, nothing much happens. But if and when stablecoin rises wildly, T-note holders will sell in droves and then the Treasury has to intervene. It’s okay, because it can just print the money, but will still have a liquidity crisis and that scares markets. But now money supply has gone up and that causes inflation (if you like Milton Friedman) so yields have to go up.

Assuming stablecoin will not offer a rate of return, then it’s more like gold, just less trustworthy.

All this equals a new cycle of some weird sort in which one of the components is not actually real and has very flaky pricing because, as Matt Levine says it’s not real. It’s magic beans.

Supposedly stablecoin would be linked to the dollar. How? If it’s linked 100% to the dollar, it’s the dollar and US Treas issuance is just an increase in liability/debt/money supply. If it’s not linked 100% forever and faithfully, the price will diverge from the dollar, setting up a splendid opportunity for techbros to manipulate it and the usual other crooks to defraud the holders. This is the second core problem with crypto. The first is that it magic beans, even if issued by the government.

It's hard to see how this does not debase the real dollar and send more investors away because the US is nuts, if they haven’t left already due to you-know-who.

Tidbit: People voted for Trump because they believed in border control and wanted to lash out against wokeness—despite Trump being vulgar, unethical and a draft dodger. Various polls put the percentage of active or retired military voting for Trump at about 60%. We can’t get over the Army coming out for a draft-dodger.

The Washington Post reports that plans for a giant military parade on Trump’s birthday, June 14, costing some $25-45 million, are still going ahead. The excuse is it’s the 250^th birthday of the US Army. (In the UK, the Army was formed in 1660, so it has 364 years and no parades). At least the Army says “there is no plan for the Army to officially recognize the president’s birthday during the celebration.” That doesn’t cut the mustard. Again, we can’t get over the Army coming out for a draft-dodger.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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