Commodities remain volatile as focus is on bond yields: Ravindra Rao

Commodities have witnessed a volatile trade in the last few days, reflecting the choppiness in the US dollar and equity market as players try to assess the implication of higher bond yields.

The US and global bond yields have risen sharply highlighting the growing optimism over economic recovery as well as expectations of higher inflation and interest rate hike.

We saw a brief relief earlier in the week as US bond yields corrected from February 2020 highs on the back of some well-received US Treasury bond auctions and subdued CPI data reading. The European Central Bank has said it will ramp up the pace of its pandemic emergency bond buys, in a bid to soothe market jitters about higher yields.

The dollar index retreated from November 2020 highs as bond yields corrected and it helped commodities edge up. The severely battered gold price tested one-week high, crude moved back towards October 2018 high while copper rescaled $9,100 a ton level.

The relief was, however, short-lived as US bond yields bounced back to retest 1.6 percent on March 12. Yields recovered sharply on the back of optimism about the health of the US economy amid some upbeat economic data and as President Joe Biden signed the $1.9-trillion stimulus package.

Market players are jittery that higher borrowing costs and inflation may affect returns. While there are no signs of inflation picking up and central banks have maintained that interest rates may remain low for a long time, market players remain unconvinced and this has resulted in mixed trade.

The next key event that could determine trend in bond yields is the FOMC meeting on March 17. The Fed has, so far, maintained that interest rates may remain low for a long time. It has also acknowledged rising yields as a concern but stopped short of taking any measures.

The Fed is expected to keep monetary policy largely unchanged but the focus will on whether and how the central bank plans to control the rising bond yields.

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