The US 10-year treasury yield extended gains to climb to a high of 1.49 percent retreating slightly while the dollar remains strong ahead of a Jerome Powell speech that is expected to determine the trend for global money markets.

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“We are in a period where the markets will fairly consistently test the central banks on both their exit strategies and their forward guidance. The market wants to now look into and price in those exit strategies and want to price in forward inflation expectations,” said Sameer Goel, Head of Asia Macro Strategy, Deutsche Bank.

Goel is of the view that the high yields will keep getting tested repeatedly especially as the break-evens and the inflation expectations priced into the markets move higher.

According to him, central banks need to draw their own lines. “To our mind, 10-year yields in the US are still short of what a lot of other reflation proxies are telling us and there is no reason why they cannot be moving into that one half-2 percent kind of a range. The question is the pace, which could make central banks uncomfortable and that is probably what they will lean back against,” he mentioned.

“If you look at bulk of Q4 of last year, the bulk of the move higher in US yields was largely being driven by the breakeven. So that was inflation expectation that as growth picks up and you see that reflation come through into assets and you have seen that in a lot of asset prices in the US but a lot of the moves now have been in real yields which talk to expectations about the Fed having to tighten rates beyond a point. As inflation expectations get to a point which are seen as being the anchor for where the Fed will need to act, you started to see a lot more expectations of tightening from the Fed started to get priced in and priced in into earlier and earlier year,” Goel said.

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(Edited by : Ankit Gohel)

First Published:Mar 4, 2021 1:29 PM IST