Red Gold: Does China Aim To Dethrone The Dollar?

Is it finally ‘go time’ in the bond market? For the moment, the answer is a strong maybe. The yield on the 10-year Treasury has burst through its 2017 highs and is behaving as if it could hit the 3% threshold, elusive since the taper tantrum of 2013.

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If you’re looking for hard guidance in today’s Federal Open Market Committee statement, I’d suggest you tamp your enthusiasm. Janet Yellen has orchestrated the slowest tightening cycle in history, defying even the ‘measured’ pace at which Alan Greenspan tightened which culminated in the housing bubble bursting. The last thing Yellen wants to do at her last FOMC meeting is stir any pot.

As far as the markets are concerned, Yellen has been a smashing success. The stock market has tacked on a neat 70% gain while at 2.70%, the yield on the 10-year Treasury has barely budged. We’re talking about a move upwards of three whole basis points (bps), or hundredths of a percentage point.

But then, neither the present nor the past dictate the stuff of legacies. That, as we wise souls know, is the purview of the future. Right or wrong, the good deeds of yesterday and today can be wiped away in the wink of an eye. That’s the nature of stability. If it lingers too long, it tends to give way to its polar opposite, instability, in what Wall Street recognizes as a ‘Minsky Moment.’ There won’t even be a way to feign surprise when that moment hits given the record low levels we’ve witnessed on every measure of complacency that exists.

For more on Yellen’s legacy, please link to my latest Bloomberg column: It’s Too Early to Judge Janet Yellen.

Did I mention the strong ‘maybe’ in answer to whether the rise in yields was sustainable? The idea that the economy has gained so much momentum it can withstand four rate hikes this year certainly gives one the warm fuzzies. But it’s hard to conjure a scenario that suggests 3% GDP growth will persist into the second half of this year, especially in a rising rate environment.

As one subscriber wrote, “The current projections for four hikes seem preposterous. Given the debt at all levels of the economy, I doubt the economy can stand those interest rates.” I couldn’t have said it any better myself.

The one jury that still remains out is the yield curve. As dramatic as the move in bond yields has been, relative to the ludicrous low rate world we call home, the difference between the yields on 2-year and 10-year Treasury remains south of 60 bps. And forget about a 3% yield on the 10-year. Can we first pierce that level on the 30-year which at last check was 2.97%?

We are not alone in watching the Fed and bond yields for clues about what the future holds. With the yuan at its strongest level against the dollar since August 2015, you can bet the Chinese are glued to their monitors as well. President Xi Jingping pulled a ton of demand forward last year to pull off a glorious 19th Party Congress. Now he’s got to deal with the aftermath as domestic growth slows, interest rates rise and exports are stressed by the strong yuan.

And yet, rumors of the dollar’s imminent death continue to circulate. Maybe the cryptocurrency contingency is right. Maybe the dollar is headed the way of British Pound Sterling. Maybe the Chinese even have designs on being the dollar’s successor. Or do they? For more on this, please enjoy this week’s newsletter:  RED GOLD: Does China Aim to Dethrone the Dollar?

Wherever you may be, wishing you well,

Danielle




About the Author

Danielle DiMartino
Called "The Dallas Fed's Resident Soothsayer" by D Magazine, Danielle DiMartino Booth is sought after for her depth of knowledge on the economy and financial markets. She is a well-known speaker who can tailor her message to a myriad of audiences, once spending a week crossing the ocean to present to groups as diverse as the Portfolio Management Institute in Newport Beach, the Global Interdependence Center in London and the Four States Forestry Association in Texarkana. Danielle spent nine years as a Senior Financial Analyst with the Federal Reserve of Dallas and served as an Advisor on monetary policy to Dallas Federal Reserve President Richard W. Fisher until his retirement in March 2015. She researches, writes and speaks on the financial markets, focusing recently on the ramifications of credit issuance and how it has driven equity and real estate market valuations. Sounding an early warning about the housing bubble in the 2000s, Danielle makes bold predictions based on meticulous research and her unique perspective honed from years in central banking and on Wall Street. Danielle began her career in New York at Credit Suisse and Donaldson, Lufkin & Jenrette where she worked in the fixed income, public equity and private equity markets. Danielle earned her BBA as a College of Business Scholar at the University of Texas at San Antonio. She holds an MBA in Finance and International Business from the University of Texas at Austin and an MS in Journalism from Columbia University. Danielle resides in University Park, Texas, with her husband John and their four children. In addition to many volunteer hours spent at her children's schools, she serves on the Board of Management of the Park Cities YMCA.