08 MAY 2025
US bond yields and the US dollar typically move in lockstep but this relationship has broken down in recent weeks.
The chart below shows the 10yr Treasury yield (blue line) still trading well above 4%, despite the trade-weighted DXY index (red line) falling over 10% from its January peak.
This is unusual, but provides further evidence that capital has been flowing out of the US Treasury market into foreign assets amidst the Trump trade war uncertainty.
History suggests this disconnect won’t last because the cost of borrowing remains such a key driver of currency moves.
So we can expect either the dollar to rebound or bond yields to fall from here.
The latter would be consistent with a looming soft patch for the US economy and a likely acceleration in Fed rate cuts.
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