- The dollar added to its losses against the euro Thursday after falling the most in 10 months to three-year lows. The exchange rate peaked around $1.25 Thursday.
- When the dollar depreciates, the price of foreign goods increase relative to domestically priced goods, making imports more expensive.
- Inflation undermines the real value of each coupon payment from holding debt, forcing the price of bonds down while raising yields to attract buyers.
- The U.S. Treasury is set to auction $28 billion in seven-year notes today.
U.S. government debt prices were mixed Thursday as the U.S. dollar continued its downward slide, sparking concerns that a weak greenback could lead to higher inflation.
The yield on the benchmark 10-year Treasury note pared gains to 2.645 percent at 12:46 p.m. ET, while the yield on the 30-year Treasury bond held steady at 2.905 percent. Bond yields move inversely to prices.
Earlier, the yield on the 10-year note hit 2.676 percent, its highest level since Jul. 2014, when the 10-year yielded as high as 2.692 percent. The yield on the 2-year note hit 2.104 percent, its highest level since Sept. 2008.
The dollar added to its losses against the euro Thursday after falling the most in 10 months to three-year lows Wednesday. The exchange rate peaked around $1.25 Thursday morning.
The dollar’s recent leg downward comes after U.S. Treasury Secretary Steve Mnuchin said a weak dollar is good for the United States at the World Economic Forum in Davos, Switzerland.
“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters, according to Bloomberg, adding that the currency’s short-term value is “not a concern of ours at all.”
His comments reinforced statements from President Donald Trump, who previously stated that the dollar was “too strong” and that U.S. exporters can’t compete because of the exchange rate.
But when the dollar depreciates, the price of foreign goods increase relative to domestically priced goods, making imports more expensive, leading to an increase in inflation in the U.S. Increasing inflation, in turn, undermines the real value of each coupon payment from holding debt, forcing the price of bonds down while simultaneously raising yields to attract buyers.
The euro also got a boost Thursday after European Central Bank (ECB) President Mario Draghi failed to convince investors that the central bank’s easy monetary policies will last much longer.
The European currency has been trending northward over the past few weeks as the region’s economy strengthens and national politics stabilize. A stronger euro could eventually hamstring European exports and weaken inflation.
The Treasury Department auctioned $28 billion in 7-year notes at a high yield of 2.565 percent. The bid-to-cover ratio, an indicator of demand, was 2.73. Indirect bidders, which include major central banks, were awarded 78.1 percent.
Direct bidders, which includes domestic money managers, bought 10.2 percent.