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US bond yields - the vigilantes retreat (for now)

US bond yields - the vigilantes retreat (for now)                         

  • USD: Citi analysts point to the recent thaw in US bond yields in April as largely expected and expects the summer months in the US will likely turn challenging once again, resulting in higher US Treasuries (UST) yields still. The team lays out four indicators that give somewhat different expectations for the path of US yields going forward with two suggesting an end -of-selloff signals and two suggesting the pause may be only temporary.      
  • USD: Two variables signaling UST yields may be peaking, include – (1) cumulative change in “carry” – Citi analysts define the period of the most recent sell-off in US Treasuries (USTs) beginning in August 2020 and ending in March-end 2021. The logic behind the “carry” variable is that at some point in the sell-off, the spread between the US Treasuries yield and the financing rate becomes too attractive for investors to pass up. This then sees a return of buyers in USTs which curbs the move higher in yields. The current widening in the 10Yr UST yield vs financing rate spread is now at its most attractive since 2018. (2) Change in 10Yr bond to swap spreads – historically observed behavior of spreads sees them widening into the peak of a sell-off and then subsequently narrowing, as we move past the peak of rate hedging flows. The resulting compression in swap spreads in April has been more substantial than in past post-selloff periods and consistent with the view that the selloff in US bond yields may be at a near peak.
  • USD: Two indicators suggesting UST yields have yet to peak include – (1) US inflation swaps/ TIPS break evens - rising inflation expectations as reflected in rising UST inflation break evens come from higher energy prices, industrial metals, transportation costs, chip shortages and other supply-chain bottlenecks as well as the rise in home prices (which herald higher rents within the CPI basket). Citi analysts now see emerging signs that inflationary pressures in the US  may be more persistent than Fed officials expect and see a further 20bp rise in US inflation breakeven yields at the long end (30Yr break evens). (2) Implied option volatility in USTs remain elevated and reflect investors positioning for higher rates as the bigger risk, than lower rates.
  • USD: Bottom Line – the overall conclusion of Citi analysts is that they do not yet see a turning point structurally toward lower rates in the US. This also probably implies that US yield divergence with the rest of the world is also yet to fully play out as US yields rise further – which likely supports the case for a more bullish medium term USD outlook.  


Data releases overnight 

  • USD: The US April ISM manufacturing report stays firmly in expansionary territory, but supply constrains mean stronger prices and weaker production than consensus. ISM manufacturing dips to 60.7 in April, shy of expectations for 65.0. New orders decline to 64.3 and production to 62.5 (compared to 68.1 in March). The employment index also falls to 55.1 while the supplier delivery index moves slightly lower to 75.0. Meanwhile, input prices hit a new record high of 89.6.  While subcomponents remain firmly in expansionary territory and indicative of a continuing recovery supported by very strong goods demand, supply constraints are clearly weighing on production and increasing inflationary pressure. Anecdotes almost universally speak to upward pressure in input prices, with semiconductors and base metal shortages cited in a few comments. And the dip in the labor subcomponent id likely indicative of labor shortages that could put upward pressure on wages that are already increasing at pre-pandemic rates. Policymakers view these as transitory, but Citi analysts see a clear risk that these may become more persistent.                


Week Ahead                    

  • USDUS nonfarm Payrolls – Citi: 1150k, median: 950k, prior: 916k; Private Payrolls – Citi: 1000k, median: 885k, prior: 780k; Average Hourly Earnings MoM – Citi: 0.1%, median: 0.0%, prior: -0.1%; Average Hourly Earnings YoY – Citi: -0.3%, median: -0.4%, prior: 4.2%; Unemployment Rate – Citi: 5.8%, median: 5.8%, prior: 6.0% - Citi analysts expect another strong month of broad-based job across sectors as activity normalizes with increased vaccinations.     

  • USD: ISM Services – Citi: 64.5, median: 64.2, prior: 63.7 - US ISM services index should continue to increase in April as a rising share of services-related businesses see activity continuing to pick up as vaccinations increase and activity patterns normalize.   
  • GBP: At this week’s MPC meeting, focus will be on forecast revisions, immediate future of asset purchases and guidance. Improved forecasts pose a hawkish temptation, but other than a more or less mechanical QE taperCiti analysts expect the Bank to be on hold though the Bank’s forecasts are likely to see significant upgrades to near-term UK growth and inflation outlook for 2022.
  • AUD: Australia RBA Board Meeting: Citi MoM Cash Rate forecast; (unchanged) 0.1%, Previous; (unchanged) 0.1%; Citi MoM 3-Year Yield Target forecast; (unchanged) 0.1%, Previous; (unchanged) 0.1% - no change in any of the policy levers or forward guidance though the policy statement is likely to give some color around the new staff forecasts that will be published in the subsequent Statement on Monetary Policy (SMP) on May 7.    
  • CAD: Canada Net Change in Employment (Apr) – Citi: -210k, median: NA, prior: 303.1k; Unemployment Rate – Citi: 8.1%, median: NA, prior: 7.5%; Hourly Wage Rate Permanent Employees – Citi: -1.8%, median: NA, prior: 2.0% - Following two months of strong job gains resulting from temporary re-openings, Citi analysts expect job losses of 210k in April. The April employment report will cover the period from mid-March to mid-April when rising virus cases led to another round of lockdowns and business closures, particularly in large provinces like Ontario.


This is an extract from the Daily Currency Update, dated May 4, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here -

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