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Short-term yields fall as Fed debates slowing pace of rate hikes

Yahoo Finance's Jared Blikre breaks down the move in bond yields as well as the FX intervention doom loop.

Video transcript

AKIKO FUJITA: Well, let's now turn to the broader markets. We've got Fed officials now moving forward towards another rate hike of 0.75 percentage points at the November meeting. We've got "Yahoo Finance's" Jared Blikre is always on top of this. And yields certainly been the focus of the week, but yet again today, we're talking about a level we haven't seen in 14 years.

JARED BLIKRE: Yes. And let's go to the YFi Interactive. I'm plotting the US dollar index. We're going to circle around to currencies in a second because what we're talking about in terms of bonds very closely linked with currencies, and there are spillover FX into equities. Everything is linked here.

So here's the US dollar index. Appreciated 17% versus this basket of currencies, mainly weighted towards the Euro, but very illustrative of what's been going on here. Here's the 10-year T-note yield. Looks very similar to that US dollar chart. In fact, they're very correlated, hitting 4.22%.

Now it has backed off a little bit higher number than that, but as you said, Akiko, most of these bond yields we have not seen since 2007 through 2011. I can put you-- I can show the 5-year. That's down 9 basis points. The 30-year, that is up 8% basis points.

So we have a lot that's happening with the yield curve right now. And essentially it has been flattening. And let me just point you, I'm going to put up the US dollar one more time here. And I have some comments from Nordea that I want to go over, because we are caught in an FX loop here.

And this has to do with respect-- this has to do with the Bank of Japan. Now Nordea is taking a look at this. "Countries," they're saying, "do not have an endless amount of US dollars at disposal to sell, meaning that FX intervention will fail when the US dollar coffers run dry." This is from the perspective of the central bankers.

Over in Japan, they have amassed a war chest of US dollars. They also hold $1.2 trillion in US treasuries. Very important here. So Nordea going on to say, "moreover, FX intervention involves selling US Treasuries," that's to get US dollars, which adds upward pressure on US rates. That's because rates are inverse to bond prices.

Stick with me, one more second here. This leads to a "stronger US dollar in isolation. This FX intervention US dollar doom-loop," illustrated here, I'll show you the picture in a second, "could lead to dollar overshooting, especially when central banks are enforcing the loop."

So here we go. Weaker yen, sales of US treasuries, higher US dollar rates, weaker yen, and the cycle continues. And that's what we've been seeing here. And this, the spillover FX, as I mentioned with respect to equities, these deleveraging actions right here, we're not going to see a bid on equities until all of this is done. And the central bankers have been very flat-footed about the response so far.

AKIKO FUJITA: Yeah, the BOJ an even tougher position, given the data we got today, right? 8-year high inflation, not at the level that we're seeing in the US, but still, they've got a very dovish policy in place. They've got the yen continuing to weaken against the dollar, and then now they're looking at inflation.

JARED BLIKRE: We didn't get to it, but the yen very volatile today. Maybe an intervention that we don't know about going on right now.