Foreign exchange traders don't necessarily pay that much attention to US Treasury auctions but in current markets may wish to do so. Monday's strong demand for 5-Year US Treasuries (USTs) has rippled along the US yield curve driving the the yield on the benchmark 10-Year UST down to levels not seen since last November. More pointedly the 2s-10s spread has come right in as the US yield curve has flattened.
The steepening of the yield curve that followed last November's election of President Trump (and which was accompanied by a rise in the broad value of the US dollar as traders pre-positioned for the implementation of Trump's economically stimulative election platform) has been reversed. And it has reversed even though the Fed has continued its policy of monetary tightening and is on the cusp of balance sheet reduction.
The pullback in UST yields, perhaps particularly the 10-year UST, is arguably not going to work in the US dollar's favour unless, and this doesn't seem currently to be the case, markets perceive demand for USTs as being a flight into safety.
With the euro/dollar having breached $1.20, and with the greenback also weak against other major currencies (including the yuan, USD/CNH) forex traders might wish to keep an eye on how UST yields are behaving. Such a stance may be particularly pertinent in light of the release on Thursday of US Personal Consumption Expenditure, and Friday's US jobs and hourly income data.
Written by Neal Kimberley, External Currency Analyst.