USD Rates: Demand for safety

Pay close attention to 1.40% for UST 10-year yield
Eugene Leow02 Dec 2021
    Photo credit: Unsplash Photo

    The reversal in sentiment overnight was striking. While US stocks and yields opened higher, these collapsed subsequently. The trigger appears to be news that the Omicron variant has found its way into the US. Logically, it would only be a matter of time before this happens and it is somewhat surprising that there was such a large reaction. It appears that the market is bracing for potential lockdown risks. 10Y UST yields, which touched as high as 1.50% intraday, closed at 1.40%. 30Y yields closed at 1.74%, levels not seen since January. Fear is high as the mix of Omicron uncertainty and upcoming tighter Fed policy bites. Implied volatility in equities and USD rates are both elevated as investors brace for a challenging December.

    Some caution is warranted given the moves in the long end of the UST curve. 30Y US Treasuries definitely look expensive. We think that the rotation away from stocks in the risk-off environment and worries about Fed hikes have prompted investors to seek safety in long duration bonds. The 1.40% level for 10Y yields is important as it divides between Delta variant pricing (1.2-1.4%) and when the world shook off COVID doldrums (1.4-1.7%). 1.40% is also the tentative pay level that we highlighted. That said, tight stops would be in order. Should this level be breached, the technical picture would look pretty grim as the market would be pricing a serious hit to the global economy. The mix of Omicron and Fed tightening is potent and looking difficult to digest. Payrolls are due tomorrow, but we suspect that it would take a backseat to Omicron developments, which the market appears more sensitive to.

    Eugene Leow

    Senior Rates Strategist - G3 & Asia
    [email protected]

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