Will bond yields soon stop scaring and the dollar exchange rate will fall?

Fear has reemerged in financial markets due to rapidly rising yields on US debt. The interest rate on 10-year bonds has increased since March from 4% to 4,7% in mid-April, and the yield on 2-year bonds touched the level of 5%, causing panic again in the financial markets, including in our country. This could be observed along with the rapidly weakening zloty and the simultaneous decline in the prices of Polish shares, especially in the afternoon of April 16.

The market may have remembered the moment when in October 2023 the yield of 10-year US bonds hit the 5% level, causing panic in the financial markets. How did it end that yields fell until December 2023? Bill Ackman's tweet appeared, an influential investor who stated that he would stop betting on a further decline in US bond prices. This one tweet turned the entire market around, causing the so-called short squeeze and started the last wave of the bull market in stock markets, thanks to the decline in discount rates.

Is there currently a chance that the increase in US bond yields will stop?

The yield of US bonds increased as inflation expectations rebounded, which may have been influenced by rising global commodity prices, including oil and metals, as well as the strength of the US economy, which does not want to slow down with better-than-expected retail sales published on Monday. 10-year market inflation expectations thus increased to 2,43% from 2,15% in December, which also forced an increase in nominal yields to the above-mentioned level of 4,7% (if investors are afraid of inflation in the future, they are demanding higher yields today ).

However, here comes the hope that perhaps the rally in bond rates that has been taking place since December will stop or reverse. This may be influenced by the factor of raw materials, which are likely to enter a potential correction or consolidation phase after recent rallies. In this, crude oil may also retreat due to the fact that, approaching the elections, Americans have again started talking about the possibility of further release of the Strategic Petroleum Reserves (SPR). In this situation, yields are already too high compared to oil prices. In addition, there is one more important argument.

TGA – tax revenues will reduce the supply of debt for some time

TGA is the Treasury General Account, i.e. the account of the US Treasury at the Fed, and tax revenues will be credited to this account now, in mid-April. The government basically has two methods of financing, taxes or debt. If new billions of USD appear in the TGA account in the form of collected taxes (we are waiting for these data), then less debt will need to be issued in the near future.

As a result, instead of financing the state's liabilities in the following weeks/months with bonds/vouchers, it will be possible to finance them from taxes.

What effect could this have? Well, a smaller supply of debt means less downward pressure on bond prices. Less pressure on prices to fall means less pressure on profitability to increase or even decline. The decline in yields or the lack of their further increase is a kind of relief for financial markets and the potential weakness of the US dollar, especially against currencies such as EUR, GBP or AUD. This could also help stabilize the PLN exchange rate or even help it recover after the last wave of sell-offs.

In other words, the more money collected in taxes, the less debt needs to be issued, the greater the chance of stabilizing profitability. What amounts are we talking about? We will find out soon, as soon as the TGA balance is updated later this month, and it is possible that the dollar will deliver another big and positive surprise for the markets.