Ten-Year Bond Spreads and The Dollar

July 13, 2009

Ten-year Treasuries traded at a yield of 3.73% on September 12, 2008 just before Lehman Brothers collapsed, fell to as low as 2.08% on December 18th, rebounded to touch 4.0% briefly on June 10th, and have settled back to 3.36% currently.  These wide swings reflect dueling ideologies that cannot decide if the U.S. economy faces a deflationary or inflationary problem, but that’s a story for a different update.  The table below documents where yields on ten-year German bunds and Japanese JGB’s were at these extremes, the associated spread of Treasuries against German and Japanese sovereign bonds, and the value of the dollar against the euro and yen on the four selected dates.

  09/12/08 12/18/08 06/10/09 07/13/09
Treasuries 3.73% 2.08% 4.00% 3.36%
Bunds,% 4.17% 3.01% 3.69% 3.27%
Spread, bp -44 -93 +31 -6
JGB’s, % 1.54% 1.27% 1.55% 1.31%
Spread, bp +219 +81 +245 +205
EUR/USD $1.4080 $1.4432 $1.3975 $1.3981
USD/JPY Y 107.15 Y 88.92 Y 98.26 Y 92.77


When Treasury yields fell, bonds spread moved in a disadvantageous way for the dollar, and vice versa.  The swing has been larger in the case of Japanese government bonds than German bunds, and the dollar appreciated against both the euro and yen when the bond yield differentials increased as market participants are pre-conditioned to expect.   However, dollar/yen was vastly more sensitive to swings in bond yields and their differentials than was euro/dollar.  The different responses of the dollar’s two most important relationships cannot be explained by the different magnitudes of the shifts in yield spreads, which were comparatively more moderate.  The explanation does not appear to rest on the yen’s role as a barometer of risk aversion, because the period between December 2008 and June 2009 included times of extreme investor preference for safety as well as a period of lessening market fear, which was also characterized by rising equity prices.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.


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