Rising Treasury yields hurting equities and risk-favored currencies, bringing broad-based selloff at least momentarily

• US equity market encountered heavy losses amid surging Treasury yields, but USD rose from its 3-year low
• NZDUSD, NZDJPY suffered losses overnight due to broad-based market selloff

US equities overnight faced heavy losses, with Dow Jones, S&P 500 and Nasdaq Composite dropped -1.75%, -2.45% and -3.56% respectively. On the other hand, Treasury yields jumped, moving up 26, 22, and 26 bps for the 7-, 10- and 20-year bills, now at 1.1199%, 1.525% and 2.191% respectively. The rising yields have offered an alternative to dividends and raised the required rate of return on equities. It also means that firms will be bearing higher debt servicing. As a result, the rising yields often appear as a downward pressure over the equity market. In the FX market, USD moved up from its 3-year low, and AUD as well as CAD all retreated, dropping from the 3-year highs. In cryptocurrencies, Bitcoin slides heavily overnight and now hovering at the $45,000 level.

The volatility has spilled over to the APAC market, with NZD suffering against both USD and JPY, and AUD suffering against USD. Moreover, even though industrial metals such as copper have been surging recently due to the stimulus-driven demand, they were unable to avoid the broad-based market selloff, further highlighting the sweeping impact from the rising US Treasury yields.

There are several reasons why the Treasury yields keep rising. The most straightforward reason is because investors are selling them, driven by the positive economic recovery outlook. Last week the jobless claims fell sharply, signaling that the market is getting more stabilized after several rounds of layoffs in the winter. When investors are expecting faster growth and inflation ahead, they tend to sell the Treasury bills, a movement that lowers the value of bonds’ fixed payments due to the lower demand. When bond prices fall, the yields climb amid the selloff. This can eventually lead the Fed to raise short-term interest rates, hurting the equity market at least momentarily. The latest auction on the 7-year bill met with little interest from investors, further driving the price down and yields up.