Soaring Treasury Yields Come to Dollar's Rescue

The latest talking point in financial markets comes from the soaring US 10-Year Treasury yield. The positive dynamic sends a rally to the greenback at the expense of gold prices, indicating that US Treasury yields have played a guiding role in both the metal market and the forex market. For novice traders and newbies, I often encourage them to analyze the prime source affecting their investments. Only when you have made clear the trend of the source can you grasp the trend of your investment. For instance, an analysis of the oil trend is the basis of investments in oil stocks and the Canadian dollar; traders must first analyze the trend of the US dollar before judging the gold trend and trading gold.

Since the trends of US Treasury yields are set to be thrust into the spotlight ahead of financial markets, traders' top priority is to figure out the factors driving the yield's growth, because their duration will determine the yield's trend. As for the current soaring yield, I accredit to three aspects. First of all, such a boom is not a recent occurrence. The US 10-Year Treasury yield has been growing since Aug. 4, 2020, when Russia announced a locally developed Covid-19 vaccine. The claim raised traders' risk appetite, sparking reversals in both the declining yields and the rising gold. What's more, the market became more aggressive in the wake of Democrats' victories in two Georgia run-off elections on Jan. 6, which means they would take control of both Houses of Congress. The yield at the time swelled to 1.14% from 0.94%. In general, the fading risk aversion is the main reason for the sharp rise in the Treasury yield. The market will grab bids on the positive news of mass vaccination and Biden's assuming office. Thus traders might switch to stocks, pushing the yield higher at the expense of bond prices.

Second, the market is betting that the US government will issue additional debts after seeing Biden‘s large-scale fiscal package, which is another boost to the yield. The third support comes from the market’s expectation on the Feds early interest rate hikes in Sept., which is initially speculated by a few investors, according to tradings of the interest rate futures in the Chicago Mercantile Exchange. Affected by these factors, the US 10-Year Treasury yield will potentially climb to 1.5% or even the two-year high of 1.94%. If the market sees strong Treasury yields enduring in 2021, chances are the dollar will embrace a reversal, while gold will receive further punishment.