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The US Treasury Yield and the Stock Market

The US Treasury Yield and the Stock Market

U.S treasury yields are little changed on Tuesday, as the investors wait for the Federal Reserve
Chairman Jerome to offer policy details in his senate nomination hearing later in the day. Powel
is due to speak on housing, banking, and urban affairs. The long-term yield slightly dropped on
Monday after rising sharply during the first week of the New Year. The 10-year yield ended
2021 at 1.51% and is currently at 1.77%. The rise in yield is mainly attributed to aggressive
policy on interest rates. Powell has previously indicated that the Fed can start hiking the interest
rates from the second of half this year.


The U.S inflation steadily rose in the last quarter of 2021. In November, the inflation rate jumped
to 6.8%. Currently, the December inflation reading is the main economic data during this week.
The Consumer Price index is scheduled to release on Wednesday and the Producer Price Index is
set for Thursday. Higher inflation readings in December are likely to prompt the Federal Reserve
to hike the interest rates early.


Meanwhile, the rising bond yield and higher inflation reading have negatively impacted the stock
market. The S&P500 dropped 1.9% in the first week of the New Year, NASDAQ ended the
week 4.5% lower to 14,936 and the 10 years yield rose 3 basis points to 1.77%.

Now the question is that whether the treasury yield will continue to rise or will there be a
slowdown. So far the majority of the analysts believe the current stock market move is familiar
over the course of the pandemic. The yield rose on three different occasions during the pandemic
and NASDAQ was accompanied by a correction. However, none of the corrections lasted long
and if the history is right the current correction is unlikely to continue over an extended period.
Now in the context of the new COVID19 variant Omicron, so far the variant is proved to be less
lethal and the world hasn’t gone into strict lockdowns. Its initial impact on the stock market
faded away towards the end of 2021 and it is unlikely to impact the stock markets on a great
scale.


Meanwhile, on the US dollar (DXY), traders seem to be adopting a more cautious approach
ahead of the Fed testimony and the consumer data during this week. At the time of writing, the
US dollar index DXY is trading at 97.11. The greenback is trading mostly range-bound after
hitting 16 months high in November 2021. Analysts expect the hike in the interest rate is likely
to strengthen the greenback.


On the technical side, DXY is trading sideways and a bullish flag pattern is building up. The
current price is moving near the support line of the flag which generally leads to a bullish
breakout. However, the volume analysis suggests lower volume, and a breakout is unlikely to
occur in the next few days and the greenback is likely to continue in the sideways range during
this week.

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