The Case of Round Numbers
By Blu Putnam, CME Group
AT A GLANCE
- In financial markets, when round numbers become important, it creates an event risk environment
- Round numbers can’t seem to hold in financial markets; either there is a decisive breakthrough or a big move backward
In financial markets, there is an intriguing magnetic power with round numbers. When markets get close to these critical round numbers, they act like lines in the sand and trading activity seems to change its character.
Round numbers can’t seem to hold; either there is a decisive breakthrough or a big move backward. Let’s take two cases that are active now.
5% Yield on 10-Year U.S. Treasuries
Is it a ceiling or a floor? U.S. 10-year Treasuries have had three significant episodes since the start of the COVID-19 pandemic. In late 2020 and into 2021, the massive fiscal stimulus from the U.S. government to help cushion the blow of the pandemic helped raise yields on the Treasury 10-year from below 1% to near 2%. In 2022, as the Federal Reserve raised short-term rates, the U.S. 10-year powered through 3% and peaked just above 4%. The latest move, taking 10-year yields closer to 5%, came as the U.S. economy continued to grow, surprising most analysts (although not us) that had thought rising rates and an inverted yield curve would lead to a recession. Will 2024 be different?
150 Yen per U.S. Dollar Exchange Rate
The first question currently revolves around when the Bank of Japan will start raising short-term interest rates, and the second question revolves around just how high might Japanese short-term interest rates go. While the question as to when rates might rise may be answered first, the peak rate question may be more important in the long run for the exchange rate. The Federal Reserve has guided that U.S. rates are likely to stay high for a long time. This means that U.S. rates will continue to have a robust premium over Japanese rates.
The bottom line is that when round numbers become important, it creates an event risk environment. The line may hold or be crossed, but when round numbers take on outsized importance, it is indicative of a very unstable market favoring non-directional options strategies for risk management.