Bond markets

Posted by Scriptaty | 5:52 AM

Another common perception in financial markets, one grounded by the table of macroeconomic effects, is a strong dollar should depress inflation expectations and, by extension, long-term interest rates.

If we construct a hypothetical series of weekly returns on a constant-maturity 10-year T-note from the Federal Reserve H 15 report (, we find the opposite. A stronger dollar is associated with declining bond prices.

is because the dollar tends to strengthen when the economy is strong and interest rates are rising. This set of conditions is associated with rising long-term interest rates.

If this is true, then a negative relationship with short-term notes should occur. These instruments tend to be more responsive to direct changes in monetary policy than long-term notes. As expected, it shows the relationship between one-year notes’ returns and the DXY is negative.