Stock Market Rally Drives Yields Higher, Making U.S. Dollar More Attractive Investment

U.S. 10-year Treasury notes and 30-year Treasury bonds closed lower on Wednesday as a surge in U.S. equity markets drove investors out of safe-haven assets. The potentially bearish chart pattern created by the move suggests the selling may be greater than the buying at current price levels. It also suggests the markets may be due for a short-term correction.

Early in the session, the yield on the benchmark 10-year Treasury note traded at 2.729 percent, its lowest level since April, before rising to 2.786 percent at the close. The 2-year Treasury note yield climbed to 2.605 percent.

Recently, investors have been flocking to Treasurys amid a steep sell-off in U.S. equities. This move has been driving yields lower. Investors move money during times of uncertainty because T-notes and T-bonds are typically considered a safe-haven as they tend to be less-volatile than stocks. Wednesday stock market rallied encouraged some of the weaker buyers to trim their positions, leading to the lower the lower close in the 10-year Treasury note and 30-year Treasury bond markets.

U.S. Dollar

Higher U.S. Treasury yields helped make the U.S. Dollar a more attractive investment on Wednesday. This encouraged recent short-sellers to take profits and trim their bearish positions.

The Dollar also rose against a basket of currencies as safe-haven buyers aggressively bought back short Dollar/Yen positions. During the eight day sell-off in the U.S. equity markets, the Japanese Yen was the recipient of most of the safe-haven buying in the currency market, followed closely by the Swiss Franc.

Amid concerns over a weakening U.S. economy, uncertainty over the direction of interest rates and the current partial government shutdown, there is a silver-lining. According to reports, there may be some positive developments over US-China relations. A U.S. trade team will travel to Beijing the week of January 7 to hold talks with Chinese officials.

Currency traders are saying it’s all about sentiment at this time. If risk sentiment keep improving and the stock markets extend their gains then the dollar could continue to improve over the near-term. This would put pressure on the Japanese yen. However, even though the Dow posted its biggest one-day gain in history on Wednesday, it’s too early to say that the move represents a dramatic shift in investor sentiment.

Other Currencies

The Canadian Dollar received some relief on Wednesday after crude oil futures surged nearly 8 percent. The Australian and New Zealand Dollars, two currencies often driven by global risk appetite, rose along with the stock market. The Aussie posted the biggest gain of the two, surging 0.42% versus 0.11%.