FX-hedged US yields highest in years

Could keep a lid on further gains

Chart of the Day

One interesting facet of recent bond market developments is that while US yields are generally still lower than before Covid hit, FX-hedged returns are now the highest in years for foreign buyers. German investors can get a 10-year yield of -0.3% at home, or 1.0% if they buy in the US and hedge it into euros. This could keep a lid on US bond yields if foreign buyers crowd into the US market.

Macro

Canada’s latest jobs report showed it added 79,000 jobs in February. Annual growth is -3.1%, above that in the US at -5.2%.

The US University of Michigan Consumer Confidence Index rose by 6.2 points in March. There isn't much of a relationship between this measure and retail sales, which should be supported by further stimulus checks.

UK GDP fell by -3.0% MoM in January, which left GDP 9.3% lower than a year earlier. Not great, but vaccinations there are ahead of most places.

Base effects sent China's retail sales and industrial production growth soaring to over 30% YoY over January & February (they release data for two months over the lunar new year celebrations), because output sank at the same time last year.

Markets

Non-commercial traders decreased their net short position in the USD last week, though are still heavily net short.

That change was mainly due to a large cut in euro longs.

Non-commercial traders cut their position in copper despite its recent strong run. Their net long position, at 30% of open interest, is above the 5-year average of 6% of OI.

US yields jumped on Friday, by 11bp, although over the whole week the rise was just 8 bp. The 30-year is now back to its early 2020 level.

This caused an interesting divergence in the VIX and MOVE on Friday, with the VIX falling further while the MOVE rose. Given higher bond yields could cause trouble in the equity market, that divergence may not last.

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