Yields Are Exploding, Should You Panic?

Lately, there have been a lot of reports around 30-year government bond yields, especially in the US and Japan. The US 30 year yield briefly tapped into 5%, while Japan’s just hit a 25 year high at 3.01%. 

You may think, why should I care about this? 

Well let me tell you. 

1. Yields can impact currencies

When long term bond yields rise, especially in larger economies such as the US and Japan, we need to take notice. Currencies often follow yields as they correlate closely together. 

One correlation we often refer to, is the US10Y and the USDJPY price. You can see from the image below how correlated the two instruments can be. This can help us traders get an edge in the markets. (not so much recently mind).

Japan’s 30Y yield popped up to 3.01%, the highest level since 1999, this was after a surprisingly strong bond auction, however this was short lived as a handful of investors sold them to take profits. 

Less demand for foreign bonds could mean that the capital stays in Japan, which could strengthen the JPY again. Combining this with a Bank of Japan policy that is yet to hike rates despite rising inflation pressures, we could see the JPY back in form.

USD/JPY, which I have been long on these past couple of weeks, could turn back to the downside, as the price looks to reject the resistance of 148.00. 

Sentiment analysis shows hedge funds buying the Japanese yen at record levels, and with USD/JPY at a major support of 140.50, I felt it was a good opportunity to sell JPY in the short-term. 

2. Gold rallies to persist?

There’s a case for gold to remain strong.  

Bond yields rising can either confirm inflation fears, or signal tightening financial conditions. For example, central banks hiking interest rates. This could be negative for gold in the short term like in 2022, but gold is often seen as a hedge against inflation. Think back to that year, gold followed a similar trend to the stock market, but rallied a couple of months for the US stock market did. 

If yields are rising due to sticky inflation, then assets like gold and silver can stay supported, and with tariffs still burning away in the background, inflation rising could be likely in a few months. Even though tariffs aren’t as high as what was initially expected, we still have a 10% base tariff across all countries, plus an extra 10-20% for those that are considered to be behind the fentanyl problem in the US, which China is one of those. 

3. Stocks to feel the heat…again

Inflation expectations rising is never good for global stock markets. When inflation rose in 2022, global stock markets had a down year. 

Rising inflation rates can hurt companies' ability to borrow capital, and hurt profit margins. 

At the moment the market is riding the wave of a US and China deal, but it may only take one hiccup in the negotiations to send them lower again. 

Final Thoughts

Don’t ignore the bond market, it's not just for us macro nerds. When 30-year yields start moving like this, it's usually a warning shot or early signal for big shifts in FX, commodities, and equities.

Here’s a little cheat sheet for you.