Reasons for and Influences from Plummet of U.S. Bond Interests

The U.S. 10-year bond interests dropped after peaking in the early second quarter, thus causing DXY to decline whereas leading gold prices to a great rally. However, the steady slump in bond interests has seen DXY fully rebounding recently. What causes the continuous downtrend of the U.S. bond interests？ Why has DXY not been adversely affected by the plunge this time？

The U.S. 10-year bond interests grew continuously in 2018, the uptrend enjoyed by DXY at the same time. However, when they saw an all-rounded plunge in 2019, DXY bucked the market trend and climbed. At that moment, hedge funds flowed into the U.S. bonds amid the raging China-U.S. trade war, coupled with capital flowing from emerging markets to the U.S. bonds for hedging because of the strong USD and hidden dangers seen by currencies of emerging markets. Therefore, USD was supported owing to the foreign capital flowing into the U.S. bonds. The steady growth of USD was ascribed to the purchasing capacity of external resources as USD exchanges had to be conducted before the purchase of the U.S. bonds.

The Federal Reserve (Fed) ultimately turned to be hawkish last month, and DXY rebounded rapidly. However, the recent rally is not due to the increase in U.S. bonds but factors similar to 2019. Part of the capital has flown from emerging markets to the U.S. bonds in a bid to avoid the potential financial crisis that remains concerning given that currencies of emerging markets are under pressure of the possible bullish USD aftermarket. In addition, the auction of 10-year bonds has been viral, and buyers have to operate USD exchanges before the purchase of the U.S. bonds because most of them are from overseas or emerging markets as predicted.

Some traders may not understand why the U.S. stocks hitting all-time highs and the escalating inflation are not conducive to bond interests as usual but to DXY. As such, the USD trend will benefit from possible plunges in emerging markets such as TRY and Argentinian peso against the backdrop of the increase in bond prices and the decrease in bond interests. Under these circumstances, USD will also become a safe haven currency, replacing gold or JPY. However, JPY will recapture its role as a safe haven currency once the financial crisis of emerging markets spreads to the world and leads the global stock market to a downtrend.

Consequently, despite the recent plummet suffered by the U.S. bond interests, JPY and even gold may continue to see pressure as the U.S. stock market surges to new highs repeatedly and DXY remains strong. In short, investors are required to understand the reasons for the downtrend of the U.S. bond interests on one hand and have a clear picture of the influences exerted by this plummet on the upcoming gold exchange market on the other hand.