US 10Y Yields: Three is not a magic number – Nordea Markets

The US 10y yield has managed to break above 3% on the back of resilient US activity data and intensified focus on US cost pressures, according to analysts at Nordea Markets.

Key Quotes

“The jump in US yields has been enough to cause another bout of risk aversion across global markets, as higher rates generally pressure equity valuations (and emerging market currencies). Elsewhere, greater cost pressure and weaker global industrial sentiment might be making matters worse via associated margin implications. While there has indeed been a rise in US market-based inflation expectations, it is not yet evident that this reflects anything more than the increase in oil prices, meaning that if the inflation story gets legs we should expect more upside in break-evens and the like.”

“It must also be mentioned that the rise in FX hedging costs stemming from Fed rate hikes continues to add upside pressure to US yields. The cost of rolling a 3m FX hedge in USD will rise to 3% later this year, according to forwards, eating up the return of longer-dated US FI investments unless yields rise. The next resistance is the 3.05% peak from January 2014.”