Fed minutes push up yields and the dollar Rates

Philip Wee, FX Strategist, DBS Bank and Eugene Leow, Rates Strategist, DBS Bank

US Treasuries sold off after the market took the Fed minutes to be hawkish. 30Y US yields are now above 3.2% (levels not seen since 2015). 10Y yields are now at 2.95%, just shy of the 3.02% top registered during the taper tantrums of 2013. There are still considerable uncertainties amongst market participants as to where longer-term yields would settle around. Term premia (especially for the longer-tenors) have thus increased significantly, steepening the back of the UST curve.

Upward momentum on US yields is still strong with 3% up as the next key technical level for the 10Y tenor. However, we are wary given the pace of yield increases over the past few months. The selloff in USTs is into its sixth month (about 90bps in the 10Y tenor since September), with no meaningful pullback. Further yield increases at this pace could dent risk-taking sentiment. At some point, yields should also be attractive enough to lure in new buyers. To be sure, the 5Y auction showed firm demand with the bid-to-cover at 2.44, roughly unchanged from the previous month. Demand for 2Y notes fell sharply, however we would not read too much into this given the volatility of the bid-to-cover ratio. The 7Y note auction on Friday should provide further clues on whether investors are keen to taking on duration risks.

FX

The US dollar, as measured by the DXY Index, extended its recovery to around 90 after the FOMC minutes turned out to be more bullish-than-expected. The minutes pointed to an upward revision in the Fed's Summary of Economic Projections at the next FOMC meeting on 21 March. The minutes did provide additional insight on its confidence for inflation to rise towards its 2% target this year. Apart from a tight labour market leading to wage increases, the Fed believes that the tailwinds from the corporate tax cuts will be positive for business investment and keep capacity utilization on its upward trajectory.

To assess if the Fed will step up its three rate hikes this year, all eyes will now turn to Fed Chairman Jerome Powell's inaugural semi-annual congressional testimonies on 28 February and 1 March. Until then, a Fed-led dollar recovery will heighten sensitivity of growth-led currencies to disappointing data. This was evident in the euro's retreat from weaker-than-expected ZEW, consumer confidence and Market business indicators in the past two sessions.

Source : Equity Bulls

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