Market Overview

Traditionally one of the major indicators for how the U.S. Dollar may move is the movement in U.S. Treasuries, but the connection between the two has been seen to weaken lately.

Such a correlation between the two is evident as Treasuries are a “Gold standard” for safe haven bonds with an ultimate security level. Any investments in Treasuries could be compared with having cash in your hands. So, any rise of Treasuries’ yields that enable for the creation of additional profits without any seeming risks could ignite additional demand for the Greenback and that could lead to its strengthening. 

The dynamics of the yield curve is not only seen as a gauge for the global bond market, but for the entire financial market. So, traditionally the rise in U.S. Treasuries’ yields signals a strengthening of the Greenback. It is considered to be a kind of rule of thumb for investors, or at least it was.

This relation between the two has seen to break down in recent months. The 10-year benchmark U.S. Treasuries’ yield soared from 0.5% in August 2020 to 1.328% on Wednesday morning, while at the same time the U.S. Dollar index plummeted from 94 points to 90.78. From the end of January 2021 yields of the 10-year bond rocketed from 0.99% to almost 52 weeks’ highs, or by a third in less than three weeks. Yields even returned to pre-pandemic levels. Meanwhile, the U.S. Dollar index has almost been unchanged since the end of January and has remained within the 90-91 point range.

Such paradox shows the true nature of the modern financial market misbalances, and a balance of inclination to risks and their aversion. Rising U.S. Treasuries yields can be seen as a symptom of the Federal Reserve (Fed) ultra-loose monetary policy with unprecedented money printing and new stimulus measures from Joe Biden’s administration, which has the support of Congress. This is seen to rise risk on sentiment in the market. Mass vaccination in developed countries fuels business activity and economic recovery.

On the other hand, the Greenback is considered to be a safe haven asset too. So, when the appetite for risk is rising the U.S. Dollar is less popular to invest amid rising volatility.

Besides, expectation of the swift economic recovery and mass vaccination boosted yields of sovereign bonds like Germany, the United Kingdom and some others. So, the rally in U.S. Treasuries’ yields is not leading to adequate rise of the demand and strengthening of the Greenback itself. 

Traders may want to consider a new reality while trading currency majors that has the U.S. Dollar on one side or the other. The U.S. treasuries’ yields in this regard are no longer a forward-looking indicator in this regard. 

However, such relations may be restored only after major economies return on the pre-pandemic growth track and the U.S. Fed neutral monetary policy is reestablished.

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.