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Analysts at MUFG Bank, point out that the Federal Reserve’s inflation “transitory” message has credibility. They see the risk of a more abrupt jump in yields is higher, the prospect remains low for now. Their outlook for the dollar remains bearish, albeit with less conviction than before.

Key Quotes:

“The communication on guidance by the Federal Reserve has been made that bit more difficult following the shock CPI print this week but the initial take is that the Fed has done a good job in convincing the market on its long-held view that the coming inflation spurt will be transitory. But of course that guidance is really only powerful if it’s credible and there are a number of factors that have helped provide that credibility, which is evident in post-CPI market moves.”

“While the limited move in 10yr is notable, there have been equally modest moves at the short-end of the yield curve also. This is important FX-wise as the short-end of the curve could prove a greater differentiating factor further ahead. Most central banks will taper this year and quite a few could hike this year and next but for the euro-zone and Japan, an actual rate hike could still be some way off.”

“With the US dollar the global reserve currency the US Treasury market remains a key market for global investors and with hedging costs still so low due to the short-end of the US curve being well anchored, the yield pick-up net of hedge is increasingly attractive.”

“While we think US yields will head higher, the above factors should mean moves are orderly and therefore consistent with the US dollar weakening further.”

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