This market is hard to wrap one’s head around, but if there is one asset that threads it all together, it is the DOLLAR.
? The changing relationship between the dollar (white) and long yields (blue), and their interaction with other assets, points to a typical US term premium shock - investors demanding more compensation to hold dollar assets - this underpins the volatile market ytd and influences currency hedging behavior. In the near term, Fed nomination could ease that shock and support the dollar.
? Beyond the immediate horizon, there is an IMMUTABLE LAW that cannot be broken: higher term premia and long yields eventually collide with debt servicing costs, and that constraint has been effective in influencing policy direction.
? Meanwhile the dollar is the pressure valve: tightening financial conditions, amplifying cross-sectional dispersion, and acting as the transmission mechanism between rates, risk, and relative performance.
