Treasury Yields Surge as Stocks Fall and Dollar Rises

The S&P 500 fell by 75 bps as the 2-year Treasury yield rose 14 bps to 4.89% following a strong S&P Global PMI report. Treasury yields moved higher across the curve, with the 10-year yield rising about 10 bps to close at 5.1%.

The move in yields was significant but, in some ways, not entirely unexpected. What was surprising was seeing such a large repricing in a single day following economic data that does not ordinarily generate this kind of market reaction. At this point, a move in the 2-year Treasury yield to 5% would not seem particularly far-fetched, but then again, I have been talking about that possibility for several weeks now.

HYG broke below key support at $78.40 today, raising the risk that credit spreads are beginning to widen more meaningfully. This is based on HYG adjusted for its dividend yield.

The breakdown is worth watching because a further decline toward $77.65 could signal additional widening in credit spreads and growing stress in the credit market.

The dollar index also rose sharply today, breaking above resistance at 100.50 and potentially setting up a move toward the 101.80 to 102 region. The stronger dollar makes sense amid rising rates, stronger economic data, and markets increasingly pricing in the possibility of additional Fed rate hikes.

If the dollar continues to strengthen, it could become another important source of tightening in financial conditions, particularly alongside higher Treasury yields and widening credit spreads.

But whether a stronger dollar ultimately translates into tighter financial conditions will depend in part on what happens in cross-currency basis swaps. So far, we have not seen signs that the dollar’s recent strength is transmitting through the cross-currency basis, but that will be important to watch if financial conditions continue to tighten.

We care specifically about this transmission channel because of its implications for global dollar liquidity and, ultimately, the liquidity available to risk assets.

(LSEG)

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

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Glossary by ChatGPT

Basis Point (bp/bps) — One-hundredth of a percentage point, commonly used to describe changes in interest rates and bond yields.

Credit Spreads — The yield premium that corporate debt pays over comparable government debt, often used as a gauge of credit risk and financial stress.

Cross-Currency Basis Swaps — Derivative contracts used to exchange funding in different currencies, with the basis reflecting relative demand and imbalances in cross-border funding markets.

Dollar Index — An index measuring the U.S. dollar’s value against a basket of major foreign currencies.

Financial Conditions — The combination of interest rates, credit spreads, currency values, asset prices, and other factors that influence the availability and cost of financing.

Global Dollar Liquidity — The availability and ease of obtaining U.S. dollar funding throughout the global financial system.

HYG — The iShares iBoxx $ High Yield Corporate Bond ETF, commonly used as a market proxy for U.S. high-yield corporate credit.

PMI — Purchasing Managers’ Index, a survey-based indicator used to measure the direction and pace of economic activity in the manufacturing and services sectors.

Risk Assets — Investments whose values are particularly sensitive to economic growth, liquidity, and investor risk appetite, including equities and lower-quality corporate credit.

Treasury Yield Curve — The range of yields on U.S. Treasury securities across different maturities, reflecting market expectations for interest rates, growth, and inflation.

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