Long-dated US treasury yields continue eye-watering ascent, 10-yr closes near 4.50%. US equity markets higher, logging best week since November 2023

By Stuart Talman, XE currency strategist

What an insanely chaotic week!

President Trump's sudden midweek U-turn to temporarily pause reciprocal tariffs in the midst of a bond market meltdown induced historically large intraday swings as market participants struggled to manage historically difficult trading conditions. The eye-watering sell-off in U.S. treasuries in response to Liberation Day caused dislocations in the world's biggest bond market as the long-end of the yield curve logged its largest week-on-week jump since 2001.

The yield on the U.S. government's 10-year note is the bedrock of the global financial system, a benchmark used to price other interest rates including mortgages and corporate debt and used in discount rate models to value future earnings and cash flows. When conditions become disorderly in U.S. rates markets, it reverberates across the globe, causing stress for financial markets.

Stress levels neared breaking point earlier in the week as the yield on the 10-year note ripped from below 3.90% through 4.50% at Wednesday's highs. As the monetary plumbing of not only the U.S, but the global economy started to crack, Treasury Secretary, Scott Bessent apparently stepped in, advising the President to walk-back the tariffs to avoid a financial market meltdown. Later in the day, Wednesday, Bessent emerged from the White House to speak to reporters, detailing Trump's decision on a 90-day pause for most of the reciprocal tariffs to enable negotiations to playout.

US treasury yields, particularly at the long end continued to push higher into the week's close, the 10-year note ending the week near 4.50% having fallen just shy of 4.60% at Friday's highs.

So, higher yields would mean a higher dollar, yeah?

Not this past week, the dollar, instead trading like an emerging market currency, raising concerns regarding the status of both U.S. treasuries and the dollar as safe-haven assets.
As long-dated U.S. treasury yields soared and the dollar index (DXY) plunged below 100.00 for the first time since mid-2023, the decoupling of a major currency from its bond market was reminiscent of the disastrous Truss-Kwarteng September 2022 mini-budget statement which threatened to cause catastrophic damage to the UK pension system as gilt-yields catapulted higher.

The 2022 UK mini-budget obliterated confidence, pushing financial markets to the brink of capitulation…..the Trump administration's all-out assault on global trade likewise brought U.S. bond markets to the precipice this past week. As investor confidence in U.S. treasuries becomes increasingly shaky, this has profound implications for the global financial system. Treasuries and the dollar earnt their safe-haven status on America's reputation as a competent fiscal and monetary manager…..a reputation that many now question, leading to significant capital outflows out of the U.S. into what are now considered safer alternatives, such as European assets.

Notably, the euro's price action of the past week appeared to attract safe-haven flows, EUR/USD gaining close to 4% to climb within reaching distance of 1.1500, its highest level in over three years.

Pro-cyclical currencies also out-performed, both the New Zealand and Australian dollars logging week-on-week gains of over four percent, NZD/USD ending the week above 58 US cents having traded sub-0.55 at Wednesday's lows. Whilst the antipodeans clearly benefitted from the 90-day pause to reciprocal tariffs, the sustainability of this week's rebound must be questioned, given the pause did not include China, the U.S. tariff rate on most Chinese imports now applied at 145%.

Given both the Kiwi's and Aussie's high correlation with China, the CNY and global risk appetite, ongoing policy uncertainty, tariff supply shocks and global growth concerns are likely to sustain ongoing headwinds.

Having leapt over 5% through the last three days of the previous week, NZD/USD again probes the upper-bound of the prevailing range that has evolved since mid-December. To start this week, a 0.5820/50 resistance zone will be closely monitored to evaluate the longevity of last week's recovery.

To the week ahead, tariff news flow and its impact on volatility and price action remains the most important dynamic for the market. For risk-sensitive assets to perform well in the week ahead, more orderly conditions in U.S. bond markets are required. Market participants will need to see an end to the astounding five-day ascent in bond yields to back a further recovery in U.S. equity markets.

It’s a  busy week ahead for tier 1 data releases, although these now present as dated given the seismic shifts in trade policy and the outlook for the global economy that has occurred in recent weeks. The ECB meeting is the headline central bank event, widely expected to deliver a 25-basis point cut.

Whilst its likely to be another extremely volatile week, expect a step-down from last week's mayhem as the U.S. and its trading partners commence negotiations.  All eyes will be on any news related to  possible U.S./China talks.

Stuart Talman is Director of Sales at XE. You can contact him here.