Our recent article, , explains that the recent 1% increase in yields, as shown below, is almost entirely due to negative sentiment. As we wrote, the bond market calls sentiment the term premium. Of the 1% yield increase, only 10% is due to fundamental factors, leaving 90% a function of bond investor concerns.
Consequently, the term premium is at its highest level since at least 1990, and it’s perched three standard deviations above its norm. The article focuses on two culprits driving the premium: rising deficits and inflation. A Twitter user replied to our article saying, “It’s the Dollar, stupid!” Despite the rudeness, he is correct; the rising dollar is also to blame.
As such, let’s discuss the recent strong correlation between the appreciating dollar and rising yields and the reasons for the relationship.
The Dollar And Yields – Historical Context
The graphs below chart the and over three different time horizons….
