Yields In Retreat Trigger A Risk Market Recovery


Solid demand for technology goods drove extended growth in Asia’s factories in February. Still, a slowdown in China underscored the region’s challenges as it seeks a sustainable recovery from the shattering COVID-19 pandemic blow.

In Japan, expanded at the fastest pace in over two years. South Korea’s exports rose for a fourth straight month in February, suggesting the region’s export-reliant economies were benefiting from robust global trade as both backyard and shipping yards remain pretty active despite the mobility restrictions.


European equities are set to open higher, with markets in Asia rebounding following Friday’s sharp losses. Tech is outperforming, helped by a stabilisation in bond markets, amid central bank sabre rattling  Broader risk sentiment remains bid, notably commodities, helped by positive vaccine news as well as the passing of a $1.9 trn US stimulus bill through the House of Representatives.


Rates markets remain in focus following last week’s UST-driven cross-asset selloff. Monday’s early price action points to a calmer start to the week following a move lower in yields globally. Australian government bonds are leading that, with the currently rallying by ~26bp—the most significant drop in bond yields since last March—after the RBA doubled down the size of its scheduled QE purchases, 

As well, US yields have rowed back a fair bit today. The yield is down 5bp, and the yield is down 3bp. Just as last week’s yield gains were entirely driven by a repricing upwards of Fed expectations, so the short end has rewound today. The 2023 and 2024 Eurodollar futures contracts (futures on 3-month money) are 10bp to 11bp lower in implied rate.

The Eurodollar strip over just two weeks brought the first Fed hike forward to the end of 2022 (a full year inside current Fed guidance), and by the end of 2023 was pricing Fed Funds at 1.0% vs Fed guidance of zero, So the market is still very aggressive relative to Fed guidance. However, Friday and today have seen conditions calm considerably.

Sure, there is a shift in the odds the Fed will move rates higher in 24 months. But the market has not budged in its view of Fed policy over the next 12 months. Simply put, the market is not challenging the Fed’s willingness to hold rates lower for longer, just yet.


The difficulty is to gauge which theme is becoming more fashionable in forex land. There is a tug of war over what matters most for the USD. On one side sits the “global reflation” theme in which the prospect of an economic upswing is set to feed further flows into risk assets, On the other side is the “US exceptionalism” theme catalyzing around  The Fed, and the sell-side consensus as being too pessimistic on the US economic outlook. If Congress passes the Democrat’s $1.9 trn fiscal proposal – already passed by the House – there will be an upside to most US  GDP forecast for 2021 that could hit 7.5%-8.5%, buoyed by the vaccine roll-out and pent-up spending to come in Q2.

For today, the EUR/USD is caught in this tug of war while commodity currencies shift higher  as oil prices  rebound  on the back of lower US yields, vaccine optimism and the US fiscal stimulus package passing the House of Representatives

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