US10Y Breaks Out Further

It’s been a somewhat stifled week for the markets with many assets and instruments trading in fairly contained manner. In the FX space, we’ve seen plenty of congestion and consolidation, in equities we’ve seen some corrective activity. However, once again this week, yields have been the big winner and when it comes to Friday’s discussions over great trades and missed opportunities, the move in US treasury yields is what we’re hearing about the most with the ten-year yield having rallied a further 10% this week. So, let’s break down what happened and why this was a great trade. If you got in, well done and if you missed it? Better luck next time!

What Caused The Move?

Inflation Expectations

The big driver behind the ongoing pickup in US yields is the increasing optimism around the US economic recovery. As the vaccination drive continues to hit key milestones (more than 20% of the population now vaccinated), the market is increasingly look beyond to the broad reopening of the US economy which is pegged to start rolling from Q2 onwards.

The baseline expectation is that the pent-up demand in the economy is going to see a spending surge which should drive inflation firmly higher in the near term. Consequently, yields traders are betting that the Fed will be forced to begin scaling out of its massive monetary easing program to help cool rising inflation.

Hawkish FOMC Meeting

The key catalyst for this week’s move was the March FOMC meeting. Yields traders were anticipating the Fed striking a more optimistic tone in light of the data we’ve seen recently and the vaccine successes and this was indeed the case. The Fed sharply upgraded all of its key economic forecasts, including inflation which it now sees hitting 2.4% in 2021 from 1.8% prior. Additionally, the dot plot forecasts reflected a hawkish shift with more members seeing a rate hike in 2022 than did previously.

Stimulus Anticipation

The meeting was a confirmation of what many yields traders have been forecasting and has essentially given yields a green light in the near term. While the Fed reiterated its message of not being worried about bond yields, it also acknowledged that there are risks in the outlook especially when it comes to the upside impact the president’s $1.9 trillion fiscal package might have on the economy.

Ok so let’s take a look at the technical now.

Technical Views

US10Y

Since breaking out above the long term bearish trend line, the US10Y has seen a sustained rally. The recent move above the 1.504 level has been an important development and while price holds above here, the focus is on a push further towards the next big resistance at 1.915, ahead of the major 2% level.

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