Widening Yield Spread Weighs on JPY, CHF & EUR| Influencer‘s Insight •Jasper Lo

Commodities other than gold, palladium and silver have been surging recently, fueling inflation at the same time. The US particularly performs so because of its healthier economic indicators compared with other major industrial countries. As a result, the market worries that neither the Fed has any more leverage to add monetary easing measures, nor the country sees any necessity to do so according to its economic and stock performance. On the contrary, the bank might gradually tighten the monetary policy in the second half of the year.

Inflation expectations in the US have soared amid hopes for economic recovery, further stimulating the hiking US 10-Year Treasury Yield. At the same time, bonds that offer the same maturity also see yields rising in other countries. Investors who are bearish about the greenback regard it as an unfavorable factor to the dollar. However, these industrial countries gained far fewer than the US in such a bond, attributed to their tepid recovery and the long-lasting deflation. Their weaker upside momentum makes the yield spread even wider. Therefore, long-term bond investors in these countries sell domestic bonds and buy the US ones, boosting the dollar by driving capital inflows.

For instance, in early August last year, the US bond yield bottomed out from the low of 0.51% while Japan‘s 10-Year Bond Yield was 0.01%, indicating a spread of 0.5% only. At the present time, the yields in the US and Japan are 1.48% and 0.13%, respectively, showing a spread as high as 1.35%. In this case, investors of Japan’s bonds may long the US treasuries, which leads to the selling of the yen and the buying of the dollar. By this account, the US 10-Year Treasury Yield will continue hampering the yen as long as it remains constructive. Similar things also occur in Switzerland, Germany, France and even a number of eurozone countries. By the edge of yield spread, pairs of USD/JPY, USD/CHF, and USD/EUR have all spiked. That yield in the UK rose even more sharply than in the US, sending aggressive upsides to the pound.

The soaring US bond yield has also put pressure on technology stocks. As most technology companies develop by borrowing or lending debts, the surging yield will result in a high cost of borrowing for them. As mentioned earlier, the economic revival has dampened risk aversion, bringing lower bond prices and higher bond yields. It dragged down gold, the Japanese yen and the Swiss franc at the same time. In general, this trend will extend to Q2 at the shortest.