Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Want To Earn A Safe 5% In Fixed Income? Buy Preferred Stocks - 24th April 19
Can Gold Price Rise Without a Rate Cut?  - 24th April 19
Silver’s Next Big Move - 24th April 19
How Can a College Student Invest Wisely? - 24th April 19
Prepare For Unknown Stock Market Price Action As New Highs Are Reached - 23rd April 19
Silver Plays a Small but Vital Role in Every Portfolio - 23rd April 19
Forecasting 2020s : Two Recessions, Higher Taxes, and Japan-Like Flat Markets - 23rd April 19
Gold and Silver Give Traders Another Buying Opportunity - 23rd April 19
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Gold Asks: Are US Bonds Overvalued?

Commodities / Gold and Silver 2018 Nov 11, 2018 - 04:20 PM GMT

By: Arkadiusz_Sieron

Commodities

“We are in a bond market bubble that’s beginning to unwind.” This is the statement of Alan Greenspan. Is he right? We invite you to read our today’s article about the US bond market and find out whether it is in bubble or not – and what does it all mean for the precious metals market. 

Bond yields are in an upward trend since 2016/2017. And they hit the accelerator again last month. The 10-year Treasury yield topped 3.2 percent, the highest level since May 2011. Other yields have also increased recently: on 30-year Treasuries hit 3.40 in October, while on 5-year US government bonds jumped above 3 percent, as one can see in the chart below.


Chart 1. Daily yields (in %) on US Treasuries: 30-Year (red line), 10-year (orange line), 5-year (green line), 2-year (velvet line), 1-year (blue line) from January 2009 to October 2018.

 
For some analysts, such high levels are not sustainable. However, when you adopt a broader perspective, you will see that the bond yields are not extremely high. As the chart below shows, their current levels are still historically low. The bond yields used to be much higher in the past – and not only in the 1970s, when inflation raised its ugly head, but even in the early years after the Great Recession. 

Chart 2. Monthly yields (in %) on US Treasuries: 30-Year (red line), 10-year (orange line), 5-year (green line), 2-year (velvet line), 1-year (blue line) from April 1953 to September 2018.

Actually, many analysts claim the opposite, arguing that bonds prices, which move inversely to yields, are too high. For example, Bill Gross, a famous bond investor, believes that the bear market in bond prices has just begun. Similarly, Alan Greenspan, the former Fed Chair has recently said that “we are in a bond market bubble that’s beginning to unwind”. And, at least this is an impression after reading an excerpt from the upcoming book by Paul Volcker, it seems that he would agree with Greenspan.

What is important here is the reason behind the recent moves. The yields increased because traders caught up with the FOMC projections for the federal funds rate next year. We have been warning investors for a long time that the divergence between traders’ bets and the Fed’s view would not last forever. About two months ago, traders were pricing just slightly more than one hike in 2019, even though the Fed forecasted three rate increases. Now, the market sees more than two hikes.

Importantly, the breakout in long-term yields made the yield curve steepen. The spread between 10-year and 2-year yields climbed above 30 basis points, rebounding to the level before the September slide, as one can see in the chart below. It’s quite funny as practically all analysts were forecasting the imminent inversion. We were skeptical about that popular narrative (see, for example, this article) and it turned out that we were right.

Chart 3: Yield curve (spread between 10-year and 2-year Treasury yields, in %) from January to October 2018.

However, what really matters is not who was right, but what we could expect for the bond and gold markets in the future. Will the yields on Treasuries continue its rally, or will we see a correction? And how will all this affect the precious metals?

Well, as the US central banks tapers its holdings just when the Treasury borrows so much, we should expect that yields will increase further. Many people worry that the increase in yields will burst the bond bubble. It could support the yellow metal, which is perceived as a substitute safe haven for Treasuries.

The only problem is that we have heard about the imminent sell-off for years. But the 10-year yields have recently spiked above 3 percent – and nothing happened. The reason for that is that the increase in yields is likely to occur not in a single, explosive upward move, but gradually over an extended period of time. Moreover, higher yield should spur renewed demand for bonds (if they generate higher income, they might look more attractive), moderating the impact of any sell-off.

The bottom line is that we could see even higher bond yields in the future. The Fed’s tightening of monetary policy combined with widening fiscal deficits should exert an upward pressure on rates. However, as the US central bank moves relatively slowly, the increase in yields is likely to also be gradual. The higher demand for bonds, in particular from foreign investors (just see what is happening in Italy or in certain emerging markets), should moderate the pressure on bond prices. The gradual rise in yields should not demolish the gold market, but it will not help the yellow metal either. The problem is that nominal yields have been rising not due to inflation, but because of the increase in real interest rates, as one can see in the chart below.

Chart 4: US real interest rates (10-year Treasury indexed by inflation, in %) from January 2014 to October 2018.

This is bad news for gold. We believe that the current macroeconomic environment remains negative for the yellow metal (although the outlook is brighter). The recent rebound is understandable given the extreme bearish sentiment previously. However, the US economy expands nicely with nominal growth around 4 percent and inflation contained around 2 percent. With high corporate earnings and solid cash flow we believe that the stock market will continue its bull market and the moderate rise in bond yields should not change it, at least not immediately.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules