I recently talked about the 30 year bond yields and how most were looking to this as a signal of uncertainty to come, but the 10 year bond yields are usually used when it comes to future pricing in FX.
The US 10-year yields have rallied since 2020, reaching 4.5% as of writing this on May 21st 2025. This rally saw yields break a 40 year decline from the highs in 1981, to the lows in 2020.
If US10Y breaks above 5% and sustains it, we could see a significant shift that could impact global markets.
Could it also provide an interesting move for the USD?
The end of an era
For decades, the US10Y has dropped, driving asset prices higher and destroying fixed income returns. But in 2020, that macro narrative shift flipped.
Yields bottomed below 1% after the Covid pandemic led to large stimulus flowing into the market, driving up inflation. The Fed had to act, and did so by hiking interest rates to their highest levels since 2001.
It's not only the US10Y but this is the one I think we should watch a little more closely. This has now begun to form a new trend considering the previous downward channel has now been broken.
What does this mean for us? the retail trader
In recent history rising US yields have support the USD. The logic behind this is relatively simple, higher returns on US assets attracts capital inflows, meaning more demand for the USD. This is easiest to see in carry trader, where traders borrow low interest rate currencies like the JPY or CHF and use it to invest in high interest rate currencies such as the USD.
But recently this correlation between the rising yields and the USD has faded.
It comes down to the narrative.
If yields rise because of strong growth and inflation, that is bullish for the USD, as the Fed is more likely to be hawkish, and hiking rates.
If yields rise due to supply and demand uncertainties, for example the recent trade tariffs, the USD is more mixed in performance.
If traders anticipate rate cuts due to recession fears, the yield curve may steepen even if the USD weakens.
Will the USD catch up with yields?
This is a question I wanted to explore, in history when we see the yields and USD decouple from each other the USD tends to catch up at some point. But that doesn't mean it will happen this time.
US10Y and USD/JPY have a strong relationship, the image below shows the comparison of the two assets.
Unless something drastically changes, I mean if we see US10Y break and run above 5%, I will look for breakout opportunities to buy USD, as the macro could be in sync with the technical at that point.
Either way keeping an eye on the US10Y will be important going forward. The USD remains soft as yields remain below the key 5% so the trigger could be that breakout.
Let's keep a keen eye on this traders.
