- US bonds rally sending yields lower, pressuring USD/JPY
- Bessent's fiscal plan calms markets
- Shallow Fed rate cut cycle caps growth and inflation expectations
- Technical, fundamental picture favours selling USD/JPY rallies
Overview
The bullish breakout in US 10-year note futures we were anticipating has played out , with the move solidify the view that we may have seen the near-term highs for long bond yields. With a shallower Fed rate cutting now expected and Scott Bessent’s nomination as treasury secretary helping reduce perceived left-tail risks regarding the US fiscal outlook, we have the ingredients in place to cap bond yields temporarily. For yield sensitive markets such as USD/JPY, this skews directional risks to the downside.
US Bond Yields May Have Topped
Whether you’re talking about the front, belly or back-end of the US Treasury curve, yields have fallen noticeably over the past fortnight. For two years, they’re down nine basis points with an even larger 13.3bps drop for benchmark 10-year yields, shown in the middle pane below. 
Source: TradingView
Part of the decline reflects far less Fed interest rate cuts than what were anticipated months ago. Using funds rate futures as a guide, just three 25 basis point rate cuts are now priced by the end of next year, curbing speculation that US growth and inflation could accelerate meaningfully in the future.
Source: TradingView
While that explains some of the unwind in benchmark yields, don’t discount Scott Bessent’s ‘3x3’ policy platform – targeting 3% US GDP, a US budget deficit of 3% and an additional 3 million barrels per day US oil production – as another factor, with markets giving him the benefit of the doubt on whether he’ll be able to deliver.
That’s removed some of the term premium that had been added to yields to compensate for increased uncertainty towards the fiscal trajectory, placing additional downward pressure on long bond yields.
Bond Breakout Assists USD/JPY Downside Break
To test the theory that we've seen the near-term high for yields, the technical picture for US 10-year Treasury futures is useful, with a big bullish breakout taking place earlier this week on the back of record volumes. You can see that in the right-hand pane below.
While the surge in trading activity was associated with the contract roll, price has now joined with momentum indicators such as RSI (14) and MACD to generate a uniformly bullish signal. If it proves to be reliable, it bolsters the case for downside for benchmark yields near-term.
Source: TradingView
As flagged in our weekly forecast note, the bullish breakout in Treasury note futures has assisted a bearish break for USD/JPY, seeing the pair do away with uptrend support before going on with the move on Tuesday. It’s already taken out minor support at 153.38, leaving only 152.14 and 151.30 standing in the way of a retest of major horizontal support at 150.90.
With MACD and RSI (14) generating bearish signals, and with the inverse correlation with US 10-year Treasury note futures strong at -0.81 over the past month, USD/JPY now comes across as a sell-on-rallies play, rather than a buy-on-dips.
Those considering short setups could use 153.38 for protection, allowing for stops to be set above targeting a deeper downside flush. The preference would be to see a retest of 153.38 first, with a failure to break through solidifying the merits of the short setup. 150.90 looms as an appropriate target from a risk-reward perspective.
As communicated previously, significant volatility from upcoming US and Japanese data is not anticipated, but be mindful of potential skittish price action with liquidity likely to be poor around US Thanksgiving.