The chart above shows the same periods of renminbi strength and weakness, but this time overlaid by the 10-year US treasury yield. The match-ups are not perfect, of course—multiple factors influence US treasury yields. Even so, the chart suggests a number of conclusions about the relationship of the renminbi’s direction and US yields.
• In what has been an overall environment of declining yields, periods of renminbi strength have typically coincided with flat or higher yields. Meanwhile, periods of renminbi weakness have corresponded with the biggest falls in 10-year US treasury yields. This makes sense if you accept that a weakening renminbi is a deflationary force for the world, while, all else equal, a stronger renminbi is an inflationary force.
• One exception to this rule of thumb was the end of 2016, which saw a sharp rise in US treasury yields even though the renminbi was falling. Clearly, this was the bond and foreign exchange markets adjusting to Trump’s surprise election victory.
• The renminbi is now rising strongly. Logically, bond yields should follow. However, yields are likely being kept in check for now by Covid lockdown fears.
• As China’s role in the global economy continues to grow in importance— and contrary to initial expectations, 2020 appears only to have accelerated this growth—the relationship between the renminbi and world bond yields is only likely to grow stronger.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
