James Comey, the British election and a diplomatic rift in the
Middle East are supposedly setting up a trifecta of investor
angst. But one closely followed macro strategist isn’t so sure
a Treasury rally that’s driven the 10-year yield to a
seven-month low is really all about investors seeking havens.
In a Tuesday note, Kit Juckes of Société Générale points to the
charts below, highlighting what he terms the “stupidly strong”
correlation between the U.S. dollar/Japanese yen
currency pair and the 10-year Treasury yield
Juckes argued that the causation seems pretty clear: the Bank
of Japan is anchoring Japanese yields through its quantitative
easing program while the yen’s relative appeal is a function of
yields overseas, as encapsulated by the 10-year Treasury.
He notes that the past year can be divided into two ranges:
“Pre-Trump, USD/JPY traded in a 98-108 (yen) range and [10-year
Treasury yields] in a 1.3% to 1.8% range. Since mid-November,
USD/JPY has traded in a 108-119 range, 10s in a 2.15%-2.70%
range. We are at the bottom of that range, in both FX and bond
In other words, the yen, relative to the dollar, and Treasury
prices have rallied simultaneously.
In the note, Juckes ponders whether this week’s move is due to
the soft U.S. jobs report on Friday and a soft ISM prices-paid
index on Monday, or by risk aversion ahead of former Federal
Bureau of Investigation chief Comey’s Thursday testimony before
the Senate, jitters over the U.K. election the same day or
concerns over the diplomatic rift pitting Saudi Arabia and its
allies against Qatar.
While both play some part, he noted that the British pound
has been ignoring polls that show the once wide lead
held by Prime Minister Theresa May’s Conservatives over the
Labor party continues to shrink and oil prices quickly dropped
back after a knee-jerk rise in response to the Qatar issue
So what is the driver?
“I’m more inclined to see this fall in U.S. yields as the last
leg of the rally which started when huge bearish positions were
squeezed at the end of Q1,” he wrote, referring to U.S.
Commodity Futures Trading Commission data that tracks trader
positioning. “Now that we’ve [seen] a sizable long position buildup in CFTC
data, I’m more inclined to view this latest move as the last
hurrah of the bond bulls, and fade it by staying long EUR/JPY
and going long USD/JPY.”