US long-term yields are expected to rise further against a backdrop of expectations that oil prices will remain elevated over the longer term, while dollar-yen is expected to remain firm despite the impact of verbal intervention.
Yesterday, views spread that the opening of the Strait of Hormuz would be delayed until after the midterm elections after President Trump rejected a peace proposal from Iran, pushing oil prices higher. This stoked inflation concerns in the market and affected interest rates.
The US 10-year yield rose to around 5.27%. At the time, the Federal Reserve was also in a rate-hiking mode to address the housing bubble, with the Federal Reserve Board (FED) policy rate having been raised to 5.25%.
Despite policy-driven increases in short-term rates, long-term yields did not rise above them, resulting in an inverted yield curve. Former Fed Chair Greenspan reportedly described this at the time as the “conundrum” of long-term yields.
Even now, verbal intervention is seen as having little effect on expectations of higher dollar interest rates, and views indicate that dollar-yen will continue to hold firm in line with dollar rates. Dollar buying on dips is expected to emerge again.
Some observers have pointed out that the yen exchange rate is affected not only by intervention from the Bank of Japan but also by the Ministry of Finance, while others believe additional rate hikes may not have a direct effect on the yen. Readers will want to watch exchange-rate movements and statements from the monetary authorities.