Short-term US Yields Rise To New Cycle Highs

January 4, 2022 at 05:46 PM

The new year started in a bearish regime for US bonds, pushing the two-year yield above 0.8% for the first time since March 2020. 

Additionally, the 10-year US yield rose sharply and jumped above 1.6%, while the 30-year yield sky rocketed above the 2% threshold. Falling bond prices and soaring yields sent the USD strongly higher – the EURUSD pair dropped below the 1.13 threshold, pushing the DXY index above 96 again.

At the same time, precious metals fell sharply, with silver plunging nearly 2% below 23 USD and gold cratered 1.5% back to 1,800 USD.

Investors expect the Federal Reserve (Fed) to raise rates in March, with two additional rate hikes anticipated in 2022. Furthermore, the Quantitative Easing (QE) program will end by the summer of 2022. 

In other news, Markit’s US Manufacturing survey printed 57.7 for its final December 2021 level, slightly below the flash level of 57.8 and at its weakest since Dec 2020. 

“While shortages remained significant, the end of the year brought with it some signs that cost pressures have eased. The uptick in input prices was the slowest for six months, and firms recorded softer increases in selling prices amid efforts to entice customer spending.” said, Senior Economist at IHS Markit, Siân Jones.

The US labor market data for December will be released on Friday this week. The US economy is expected to have created 410,000 new jobs, nearly double the 210,000 in November. As a result, the unemployment rate is forecast to improve a notch to 4.1%.

An improving labor market might cause another wave of selling bond markets, increasing their yields. 

The theme for the next months is clear – tightening monetary policy in the US, likely leading to higher yields in the bond markets, possibly causing stress in other asset classes, such as stocks or precious metals.

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