Virus Variant Impacts T-Yields, USD

On Friday, US Treasury yields experienced sharpest drop since the pandemic began as investors rushed toward safe haven assets following the emergence of a new coronavirus variant in South Africa.

The two-year Treasury yield, which typically moves in step with interest rate expectations, was down 14.2 basis points at 0.502, the sharpest drop since March 2020.

Yield on 10-year Treasury notes was down 14.9 basis points at 1.495%, the largest drop since February of this year. It last traded at these levels in early November.

Yields had been rising throughout the week following the reappointment on Monday of Jerome Powell to a second term at the helm of the Federal Reserve.

That, along with signs of strength in the US economy, had pressed investors into taking bets that the Fed would move more aggressively to fight inflation.

The yield curve steepened, with spreads between five- and 30-year Treasuries rising back to their levels before the news of Powell’s reappointment on Monday.

Right now the USD is being driven by US yields. Over the last few days yields had been driven higher by faster Fed tapering expectations.

This was fueled by Clarida’s and then Daly’s comments. Now the variant news hits folks think this may halt the Fed taper timetable.

Fed fund futures give the impression that rate hike expectations are dipping now. This hits yields, this weakens the USD. This is a yield driven story and why the USD is weaker on Friday.