Treasury Yields Reach 2016 Highs, U.S. Dollar Continues to Climb

Global bond markets resumed the post-election selloff spurred by expectations of increased fiscal spending under President-elect Donald Trump.  In addition to the expectations for a Fed rate hike in December, where the probability currently stands at over 85%, uncertainty premia is being taken into consideration by investors given the opaque outlook for foreign demand for Treasurys as a result of Trump’s implied protectionism.  US Treasury yields reached new highs for 2016, with the yield on the 10-year note adding eight basis points on its way to 2.23%, a sharp reversal from the record-low 1.318% recorded just four months ago.  Similar term U.K. gilts posted their sixth consecutive day of falling prices, bringing yields to a five-month high.  In China, debt maturing in 10 years fell for the seventh straight day, the nation’s longest streak in three years.   Overall, the value of bonds worldwide have suffered a $1.2 trillion decline over the past week while global stocks gained more than $1 trillion in worth.   

Building off the expectation of economic expansion, the US Dollar rallied for the fourth straight day against major currencies, with the dollar index gaining 1% to 100.04, its highest level in eleven months. Throughout the day the euro touched as low as $1.072 before holding near $1.076, down 0.9%, while the Japanese yen also hit a multi-month low after falling 1.3% on the day to 108 yen/dollar.  Elsewhere, the Chinese yuan declined to a six-year low in addition to the South Korean won sliding to its lowest level since June following political turmoil.   

Oil touched 3-month lows before recovering later in the trading session as fears over a global supply glut begin to build.  On Friday, Iran reported increased production at three western fields at a pace faster than initially projected.  At those fields, per day output increased to 250,000 barrels compared to 2013’s 65,000-barrel level.  Iran informed OPEC that total production in October increased by 210,000 barrels a day, the nation’s largest increase since sanctions were lifted in January.  Adding to the supply concern, the US reported that it has put 130 rigs into production since May.  Crude pared its daily losses after it was reported that Qatar, Algeria, and Venezuela were leading an effort to establish an output-freezing plan prior to the November 30th OPEC meeting.       

Abroad, Japanese stocks rose 1.7% on the day after the economy reported higher than expected GDP growth last quarter.  The economy expanded at a seasonally adjusted annual rate of 2.2%, the largest quarterly movement since June 2014, compared to a projected 0.9% advance.  Highlighted in the report was a two percent increase in exports, led by shipments of smartphone parts and steel.  The only caveat to an otherwise robust GDP figure was private consumption, which accounts for nearly 60% of Japan’s economy, only rising by 0.1%, signaling muted domestic demand.

The DJIA finished up 0.11%, while the S&P 500 closed just below even and the Nasdaq Composite fell slightly more than 0.35% for the day.  The continued bond rout pushed Treasury yields/swaps rates up 4-12 bps across the curve.  WTI crude oil gained 7 cents to $43.48/barrel for the day while Brent crude trimmed 0.5% to $44.51/barrel.  Natural gas rallied almost 5% throughout the session, reversing most of the 5.3% fall from last week that resulted from a reported US supply increase.