China’s 10-year Yield Bumping 4%

By Tom McClellan

China-US 10-year yield spread
November 16, 2017

Even before President Trump’s Asia trip, Chinese 10-year sovereign bond yields have been pushing higher.  And that means we should expect the same for U.S. 10-year T-Note yields.

I wrote about this relationship back in May 2017, noting that a big spread between the yields in China and the U.S. can mark an inflection point for U.S. yields.  To identify when the spread was getting to an actionable point, I used 50-2 Bollinger Bands.  That designation means that the bands are set 2 standard deviations above and below a 50-day moving average.  I have left that moving average off the chart just to help reduce visual clutter.

This week, we are again seeing that China-U.S. yield spread poking the upper band, and at its widest value since April 2015.  This comes about because the China 10-year yield is pushing 4% and the U.S. yield is remaining basically flat.  History says that the widening spread should eventually serve to pull U.S. yields higher.

It may not be that long-lasting of a rise in U.S. yields, because there are already signs that the China 10-year yield is outrunning its support.  China’s 10-year yield is very closely correlated to the dollar price of copper, but there is a twist in that relationship.  Sometimes we will see a divergence or other slight disagreement between copper and the China 10-year yield, and when that happens it is usually copper that ends up being right.

China 10-year yield and copper prices

Copper prices peaked back on Oct. 25 and have dropped slightly, even as the China 10-year yield has kept on rising.  This is what I mean by saying that the 10-year yield may be outrunning its support.

That does not excuse the U.S. 10-year yield from needing to play catch-up to where China’s yield has already gone.  But it does suggest that the catch-up effort may not last that long.

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