The recent spike in bond yield was triggered by economic recovery and a rise in inflation, followed by hawkish statements from the U.S Federal Reserve after a meeting held last month.
The U.S. Fed kept interest rates steady for now but indicated the possibility of earlier-than-expected rate hikes. More members now see the first interest rate hike occurring in early 2022 if progress continues as expected.
Throwing light on asset tapering, the committee now sees the need to moderate the pace of asset purchases if the progress continues as expected.
A year ago, in 2020, the yield on the benchmark 10-year U.S. Treasury Notes bottomed out around 0.50–0.60% and started rising from that level. It formed a double-bottom-like technical structure on the weekly chart and gave an upside breakout in November 2020 around 0.90% level. Subsequently, it rose to 1.77% in March 2021 before retracing up to 50% of the recent rally and touched 1.10–1.15% in August 2021.
10Year U.S. Treasury Notes Yield - Weekly Chart, Current Yield Rate - 1.51%
Now, the yield on the 10-year T-note is trading at a key level of around 1.50%. It has been consistently gaining in the last seven weeks. Also, an analysis of weekly charts of the 10-year U.S. T-notes suggests the following:
An analysis of the yield data over the last seven years suggests that a level of 1.45–1.50% is a key level, and an upside move will resume in case of sustainable trading above this level.
Further, technical indicator RSI bounced from 39–40 levels, and a range-shift analysis of weekly RSI indicates a continuation of the bullish trend. Another trend following indicator weekly MACD has now given a bullish signal above the central line.
Another observation is that it took support at an upward sloping 52-week moving average and has now started moving in an upward direction.
Summary: An analysis of 10-year bond yield data on the multi-timeframe charts indicates that yield may rise further from here, and the probability of it touching 1.95–2% is quite high in the next 12–18 months. We expect the current move in the bond yield to remain in continuation, and most probably, it will retest 1.95–2% in the next 12–18 months, and it may move toward 2.20% if it sustains above 2%.
Impact on Equity Market
In a scenario of rising bond yield, money usually moves from riskier assets like equities to safer assets like 10-year bonds. Hence, there is a huge probability of a sell-off in equities, which cannot be ruled out.
Further, we expect that the current upside move in bond yield may impact money flow in the equity market as a rise in bond yield may cause more allocation toward fixed-income assets, resulting in an outflow from equities.
Hence, we expect the coming few quarters to be quite interesting from this perspective which may impact equities.
Impact on Dollar Index (DXY)
The constituents of the Dollar Index are Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.
The rise in the bond yield may impact the global currency market, including the U.S. dollar and Dollar index. Generally, a rise in bond yield keeps investors away from risky asset classes, leading to more allocation toward “less risky assets” and safe-haven U.S. Dollar. As a result, the U.S. Dollar and Dollar Index start rising.
Dollar Index (DXY) - Weekly Chart, CMP - $94.25
The analysis of the Dollar Index (DXY) weekly chart in conjunction with 10-year U.S. T-note indicates the following:
The Dollar Index took support around the earlier support zone (i.e., the price zone of 2019 from where it started moving upward) and formed a “double-bottom” price structure on the weekly chart. After ward, last week, it already gave a breakout from a “double-bottom” price structure.
Technical indicators like RSI, MACD, and DMI/ADX on multi-timeframe charts also suggest bullish trends in this particular asset class.
Apart from the above, the Dollar Index has already started trending above the long-term key moving average on the weekly chart, with a “golden cross over” of the 200- and 50-DMA on the daily chart.
Summary: After considering the factors listed above, we expect the current upside trend in the dollar index to remain in continuation. And slowly and gradually, the current ongoing move in this space may lead towards 96.40–97 levels, followed by 99–100 kinds of levels in the next 12–24 months. Further, an analysis of the last 10-year weekly chart also suggests that the Dollar Index may move toward 100 in the next few quarters.
Impact of Rising Dollar Index (DXY) on Indian Rupee (INR) A rise in the bond yield is generally bullish for the U.S. Dollar and Dollar Index. And it may turn negative for Indian Rupee(INR), and the Indian currency may depreciate from the current level.
USD/INR weekly chart -
The analysis of the weekly USD/INR chart indicates the following:
The USD/INR has already given a breakout above the one-and-a-half-year downward sloping trend line along with a “symmetrical triangle” on the weekly time frame chart.
The momentum indicator RSI also turned upward after taking support around 41–42 levels and has now approached to give a breakout above the one-and-a-half-year downward sloping trendline along with a positive crossover.
Other technical indicators like MACD and DMI/ADX also started showing some positive traction on multi-time frame charts.
Further, USD/INR is now trending above 50- and 200-DMA, with a “golden crossover” of respective DMA.
Summary: The current move in USD/INR indicates sustainable trading above the 75 level may lead to further depreciation in INR from current levels. It may retest previous all-time high levels, i.e., 76.50–77, in the next few months and quarter(s).
"Successful investing is anticipating the anticipations of others." & "Markets can remain irrational longer than you can remain solvent." -John Maynard Keynes
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