Yields are lower even as oil prices rise. Here's what's going on
Over the past few weeks, one thing has been certain: Oil prices rise, driving yields higher and pushing stocks lower.
Except that's not what's happening on Thursday. Stock futures were higher even as Brent crude briefly topped $97 per barrel for the first time since late July.
West Texas Intermediate futures were also up more than 1%, trading above $92. Meanwhile, Treasury yields fell on the day, with the 10-year note yield sliding 6 basis points to around 4.74%. It hit a 2023 high above 4.81% earlier this week.
The 30-year bond yield fell 4 basis points, to 5.221%. So what's going on? There are two reasons: New comments from a top Federal Reserve governor A sharp rally in the Japanese yen Waller supports no rate hike Fed Governor Christopher Waller said Thursday he would support keeping the central bank's overnight rate where it is today, in a range of 3.5%-3.75%.
He said recent trends "suggest we are finally seeing some signs of disinflation." "If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting," Waller added . The 10-year Treasury yield, which was flat earlier in the day, fell following Waller's remarks — along with expectations of a rate hike later this month.
The CME Group's FedWatch tool now shows a 52.6% chance of a rate increase at the Fed's Sept. 15-16 meeting, down from 63% on Wednesday. Equity and bond investors had been fearing the Fed would have to raise rates. Now, those worries are somewhat alleviated.
US10Y 5D mountain U.S. 10-year yield Huge yen rally The Japanese yen rallied nearly 2% against the dollar, to 155.68, after a Bank of Japan official said overnight the central bank could raise rates to defend against the sharp declines in the country's currency. Even after Thursday's advance, the yen remains more than 5% lower against the dollar in the past year.
"A stronger JPY could be the thread that helps unravel a lot of the macro overhangs weighing on equities to the extent it continues (a sustained rally in the yen would in theory remove upward pressure from global yields)," wrote Adam Crisafulli of Vital Knowledge. This is partly due to Japan being the largest foreign holder of U.S. Treasurys, at roughly $1.1 trillion .
A stronger yen could create a virtuous circle, relieving pressure on Japan to intervene in currency markets, as it did alongside the U.S. in July. That, in turn, might mean Japan wouldn't sell part of its U.S. Treasury holdings, and might in fact have an appetite to buy more.
To be sure, Mark Newton of Fundstrat thinks the latest yen move will "prove short-lived," as other BOJ officials have not yet become more hawkish.
"Short-term USDJPY weakness is underway, as the daily chart has broken its minor uptrend from the early-August lows, but I doubt it has much longevity just yet, and the more meaningful move likely waits for the BOJ meeting itself, which lands right near the FOMC on 9/18," Newton wrote.