Dollar Soft as Real Yields Fall to Record Low

July 26, 2021
  • U.S. 10-year real yields fell to a record low of -1.13% before recovering to -1.10%; the conflicting narratives will make the Fed’s job even trickier as it meets this week; Fed manufacturing surveys for July will continue to roll out
  • ECB asset purchases for the week ending July 23 will be reported; German IFO business climate survey for July came in soft; U.K. virus news stream is improving; South Africa President Ramaphosa is trying to patch things up after the recent riots
  • Japan reported soft preliminary July PMI readings and June department store sales; Australian banks are getting much more negative on Q3, enough to warrant a dovish shift in the RBA China was caught in a whirlwind of headlines netting out led to a 3% drop in local equity indices; crypto assets have staged an impressive rebound overnight with Bitcoin up 10% and Ethereum up 8%

The dollar is soft ahead of the FOMC meeting this week.  DXY continues to trade just below 93 but should eventually test the March 31 high near 93.437.  The euro is staging a modest recovery but remains heavy so far unable to break above the $1.18 area.  Sterling is having trouble breaking back above $1.38 even though the virus news stream has improved (see below).  USD/JPY is trading lower after being unable to build on its recent gains to 110.60.  A break above 110.65 is needed to set up a test of the July 2 high near 111.65.


U.S. 10-year real yields fell to a record low of -1.13% before recovering to -1.10%.  That was the previous record low from September 2020.  With 10-year breakeven inflation rates largely steady around 2.34%, the drop in real yields has come largely from the drop in nominal yields to 1.24% currently, up from a low of 1.22% earlier today.  Bond markets are getting increasingly concerned about the potential impact of the delta variant, it seems, and are looking through the current inflation picture.

The conflicting narratives will make the Fed’s job even trickier as it meets this week.  With inflation spiking beyond what we would consider transitory, we expect the Fed to  continue tiptoeing down the path to tapering.  Yet it will be all the more difficult for Powell and Co. given growing concerns about the economic outlook.  That said, we believe those concerns are overblown.  While the recent rise in U.S. infections is worrisome, the relatively high vaccination rates in the major economic centers of the country suggest that the risks to growth from potential lockdowns remains low, at least for now.  

Fed manufacturing surveys for July will continue to roll out.  Dallas Fed is expected at 32.3 vs. 31.1 in June.  Richmond reports tomorrow and is expected at 20 vs. 22 in June.  So far, Kansas City came in at 30 vs. 27 in June, Empire manufacturing came in at 43.0 vs. 17.4 in June, and Philly Fed came in at 21.9 vs. 30.7 in June.  So far in Q3, the U.S. manufacturing sector remains robust.  Of note, Markit preliminary July PMI readings were reported last week, with manufacturing coming in at 63.1 vs. 62.0 expected and 62.1 in June and services coming in at 59.8 vs. 64.5 expected 64.6 in June.  This dragged the composite PMI down to 59.7 from 63.7 in June.  June new home sales (4.0% m/m expected) will also be reported.


ECB asset purchases for the week ending July 23 will be reported.  Net purchases were EUR22.1 bln for the week ending July 16 vs.  EUR22.1 bln for the week ending July 9.  The ECB has been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March, but there have been a couple of outliers on both sides.  That said, the large net purchases the past two weeks underscore our belief that the ECB will not risk making any premature moves that could endanger the recovery.  Indeed, we expect purchases to remain a bit above average in the coming weeks in order to give the ECB’s recent policy changes more heft.

German IFO business climate survey for July came in soft.  Headline fell to 100.8 vs. 102.5 expected and a revised 101.7 (was 101.8) in June.  Expectations fell to 101.2 vs. 103.6 expected and a revised 103.7 (was 104.0) in June, while current assessment rose to 100.4 vs. 101.8 expected and a revised 99.77 (was 99.6) in June.  IFO official noted that “Companies are becoming a lot less optimistic for the coming months.  In manufacturing, almost two thirds of all companies are telling us they’re experiencing supply problems.”  No wonder the ECB is increasingly worried about the durability of the recovery. 

The U.K. virus news stream is improving.  With little in the way of data, markets will likely focus on the virus numbers.  In that regard, the news has been good of late, as new cases dropped for a fifth straight day to around 29k.  It’s too early to celebrate, however, as the potential impact of Freedom Day last Monday has yet to be seen in the virus numbers.  Recent developments may help Johnson recover in the polls in the coming weeks.  A YouGov poll published over the weekend showed the Tory lead over the opposition Labour dropped from 13 points to 4, the narrowest gap between the two parties in YouGov polling since February.

South Africa President Ramaphosa is trying to patch things up after the recent riots. The government announced a new relief package and easing of mobility restrictions. Lower-income citizens will once again get their ZAR350 ($25) welfare transfer until the end of March. This should cost the coffers about 0.5% of GDP. Business will get further employment tax incentives and other tax breaks. On the restrictions, the government moved the country from level 4 to level 3, allowing for larger gatherings, resumption of alcohol sales, and softening other restrictions. Recent data suggest South Africa’s infections are in decline and 20% past its peak, so the moves seem appropriate given the urgent state of social tensions. In terms of asset prices, the rand continues to underperform most major EM currencies over the last few weeks and we still don’t see any reason to get optimistic; best to stay on the side-lines given the number of uncertainties with long-standing economic weaknesses.


Japan reported soft preliminary July PMI readings and June department store sales.  Manufacturing fell to 52.2 vs. 52.4 in June, while services fell to 46.4 vs. 48.0 in June.  This dragged the composite lower to 47.7 vs. 48.9 in June, the lowest since January and the third straight reading below 50.  Elsewhere, nationwide sales fell -1.6% y/y vs. a 65.2% gain in May.  While most of the world reports Q2 GDP this week, Japan won’t until August 16.  It may eke out some modest growth but the Q3 outlook is unclear given the nature of the pandemic.  We still expect another fiscal package in the coming weeks as the outlook worsens. 

Australian banks are getting much more negative on Q3, enough to warrant a dovish shift in the RBA.  With lockdowns and lockdown protests roiling the economy, two major banks now look for a contraction in Q3.  As a result, both look for a reversal in its tapering, with one looking for a return to weekly purchases of AUD5 bln and the other looking for an increase to AUD6 bln.  Many fear that the weekend protests will turn into a super-spreader event, necessitating longer and deeper lockdowns.  After a brief bounce to test .74 last week, AUD is softer this week and likely to test last week’s cycle low near .7290.  We still look for an eventual test of the November 2020 low near .6990, especially if the RBA were to pivot more dovish.  Next policy meeting is August 3 but that is likely too soon for such a pivot. 

China was caught in a whirlwind of headlines netting out led to a 3% drop in local equity indices. Here is a summary of the stories and our take. (1) The government is planning an overhaul of private education system, which officials said has been “hijacked by capital.” We see two sources of concern there, validations of a more interventionist state and an extension of the tach sector crackdown. Unsurprisingly, tech education stocks fell some 50%. (2) High-level talks between China and the U.S. in Tianjin are not going well. The harsh words are nothing new, but the lack of any conciliatory headlines says a lot about where the baseline of the relationship lies. (3) The UK is set to remove China’s state-owned nuclear company (CGN) from some of its power plant projects. Although probably not directly connected, recall that last week a large set of developed nations condemned China’s involvement in recent hacking operations. Again, we think the Biden administrating is successfully tuning the tide towards more coordinated geopolitical objectives of its allies, and a result will be a more polarized world.


Crypto assets have staged an impressive rebound overnight with Bitcoin up 10% and Ethereum up 8%. As often the case in crypto markets, this move was triggered by a string of directional headlines (positive in this case) leading to a massive wave of short-squeezes that fed into the momentum. Much of the news flow revolved around speculation of Amazon getting involved in the space in some way – though note that this news is a few days old. But we also had some supportive comments from Tesla’s Elon Musk (which seems more volatile that Bitcoin prices themselves), along with the usual bullish remarks of Ark’s Cathie Wood. Some estimates place the total short positioning liquidation at over $1.14 bln (with over 100k accounts being liquidated).

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2021. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see

captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction