This past week saw the market undergo its first real test of how it would manage headline risk.
A Bloomberg report that China may trim or halt its purchases of U.S. (China Weighs Slowing or Halting Purchases of U.S. Treasuries — January 10, 2018) Treasuries prompted selling in the Treasury market, sending the yield on the benchmark 10-year Treasury note to its highest level since March 2017. The higher yields pushed equity investors to take some profits in a knee-jerk reaction.
An already weak dollar traded to new two-year lows (see Dollar Index DXY chart below) on the China-related headline, despite robust economic growth. So, some international investors are reluctant to buy more Treasury securities. The 10-year Treasury bond yield has risen from 2.41% at the end of 2017 to an intraday high of almost 2.6% last week. As the yield curve gets steeper, this will give the Fed potential room to raise key interest rates further, but the slide in the dollar raises some new concerns.
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