Tensions in the fixed income market – Market Overview

By: Miguel A. Rodriguez

14:32, 26 February 2021

Yields of American treasury bonds reached new highs, and with the 10-year bond surpassing the 1.60% level, the U.S. dollar experienced a big rally.

Fed vs ECB – two different point of views.

The Federal Reserve did not show a great deal of concern about tensions in the fixed income market (especially in long-term references) and announced that it would maintain its policy of unlimited asset purchases with interest rates at historic lows. However, the European Central Bank members have expressed their concerns about the possibility that these interest rate hikes could adversely affect the economic recovery of the euro area.

According to ECB board members, the central bank could step up its bond purchases policy should this outflow continue. An inflationary rebound could indeed be what the ECB is waiting for. Still, rising long-term interest rates could endanger economic recovery and the stability of the most vulnerable countries due to their high level of indebtedness.

As an example, yields on Italian 10-year bonds have risen 40 bps in the last two weeks.

Asian stock markets hit hard.

This whole situation is causing uncertainty in global stock markets, not only in the United States but also in Asia. The Japan225 index is down nearly 4%, the most significant drop in a day after a sustained rally. The index is getting close to the 28840 support level below which the bull market would be over from a technical perspective.

The U.S. Dollar is on the rise, as the Euro plunges.

The U.S. Dollar is rising against all its counterparts but especially against commodity currencies such as the Australian Dollar and the Canadian Dollar, currencies of countries that could be more affected if an interest rate hike delays the global recovery.

As for the Euro, the ECB’s support for additional bonds purchase and an intensifying of its ultra-expansionary monetary policy has caused the currency to drop. After Bank of America changed its forecast for the EUR/USD pair, the Euro lost even more ground.

At the moment, the pair would need to trade below 1.2065 to gain bearish momentum.

Sources: WSJ, FXLive.

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