How long will the rising rally of the American continue based on the growth of profitability of the US bonds?

Starting in 2018, the dynamics of 10-year-old state bonds and the US dollar index was multidirectional, which is associated with a change in leadership in the United States and related risks. But, starting from the middle of April, the correlation between the dollar and the yield of state bonds became positive, thereby providing support to the dollar in correction after a decline at the beginning of the year.

US state bonds

Yield of the US state bonds have a big impact on the dynamics of the US currency and, as a rule, this connection is direct. But, under certain conditions, the correlation of state bonds and the US dollar may be negative, which can be traced during uncertainty and risks.

The main indicator of the entire state market of the US bonds is the yield of 10-year US bonds, which set the tone for the debt securities market. Also on the dynamics of 10-year-old state bonds rely on the analysis of the US dollar.

How much will the profitability of state bonds?

According to various estimates, the yield of 10-year state bonds can be limited from 3% to 3.5%, as well as the possibility of strengthening of the US currency on this driver. At the same time, the yield of the state bonds is limited by a number of factors:

  • inflation of the USA,
  • the pace of tightening monetary policy,
  • employment and many other indicators of the US economy.

Against the backdrop of continued optimism and a return to the pre-crisis level, it is possible to restore the bonds to 4% in the middle of 2008 and even to 5% in 2006 and 2007. But this is possible only in the long term, but not in the existing realities of the market.

State bonds and limiting factors for their growth

The main limiting factor for the growth of the yield of the US state bonds above 3-3.5% are stock exchanges. With the strengthening of the state bonds under pressure are investments in stocks, which is observed recently.

Blue line is the yield of 10-year-old state bonds, the red line is the dynamics of the DOW 30 index.

Under this principle of avoiding risks, other more risky assets, such as raw materials, also turn out to be under pressure.

Also with a significant increase in state bonds will increase pressure on the budget, which can cause pressure on investors and reluctance to take on debt liability.

The index of the US dollar, the purple line – the yield of 10-year-old state bonds.

As a result, the profitability of the US state bonds with further growth will meet increasingly strong resistance. On the other hand, the growth of the US state bonds does not guarantee the strengthening of the American currency, if only because the American will limit the negative dynamics of the stock exchanges, and with it the reduction of investments. As a result, this will lead to a logical level of profitability of the state bonds, justified by the market.

Anton Hanzenko

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