The flattening of the US yield curve hasn't really changed despite the recent breakout
The US dollar may be getting a bid now as US yields continue to rise, but it doesn't change the fact that the yield curve is still flattening.
Some economists argue that a flattening yield curve is an indicator that a recession is coming, but the Fed argues that it is a case of "correlation shouldn't be confused with causation". I've talked more on that here previously.
In the previous rate hike cycle, the bond market waited for the Fed funds rate to catch up before breaking higher - but it looks like this time it may be a bit different, and that could be good news for the dollar.
As yields continue to rise, it'll likely put a small dent in the equities rally that we're seeing so far this year. And if yields continue to rise towards 3% or higher, expect the dollar to rally further. Credit spreads have been tightening over the past few years, and that has given rise to speculative/junk bonds - but if US yields continue to rise, it's going to make Treasuries look a whole lot more attractive.
The recent spike in bond yields are already starting to send some volatility signals into the market. The VIX is now up to 13.84 today after hovering below 10 for so long. If it was anything that was going to inject volatility into markets, it was likely to be the bond market.
And this could just be the beginning.
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