Wariness on China keeping UST yields low

The reaction of the market to the September 16/17 FOMC meeting is somewhat similar to March when the market was anticipating Fed hikes. Back then, the DXY and UST yields were on the high side in the lead up to the March 17/18 FOMC meeting. Subsequently, as rates were kept on hold, USD strength waned while UST yields headed lower. Events played out similarly this round. 10Y UST yields are now 17bps lower than the recent peak of 2.30% while the DXY retreated immediately after the FOMC meeting. 

If expectation of Fed normalization is delayed, it would be reasonable to assume that USD rates would creep back up. However, the market has become increasingly worried about the state of the global economy with the Fed's inaction focusing the market's attention on China. These concerns have kept the VIX index elevated (the index has been above 20 for the most part of the period since the CNY fixing devaluation in August). 

Needless to say, commodity prices remained depressed and this has had knocked on effects on inflation expectations which are close to the all-time low (as measured by the 5Y inflation swap, 5Y forward). Worries have not abated and for now, high frequency indicators in China are likely to factor heavily on UST yields.