BOND YIELDS PLUMMET
Friday, 9 July 2021
BOND YIELDS PLUMMET
A sharp plunge in Treasury yields hit markets this week. The US 10Y yield dropped to 1.29% which helped gold rise back above the USD$1,800 level. Markets are experiencing a greater than normal level of uncertainty as investors weigh up the possibilities of inflation, monetary tightening, and COVID mutations hindering the economic recovery. At least some market participants are clearly expecting weaker equity market performance from here on in, and are piling into bonds as an alternative.
Investing for the rest of this year will likely be a case of positioning funds where you can preserve wealth, as opposed to grow it, with market valuations at extremes in comparison to the risks ahead.
US 10Y BOND YIELD
For those asset managers and investors who are thinking the broader stock market is overvalued, the natural move is to allocate more funds into the bond market. We are seeing yields moving from one extreme to the next, with money flooding into bonds the past few weeks after inflation fears peaked in March/April this year. Despite the drop to 1.29% US yields remain quite high in comparison to many other government bonds and we have a summary as at today of the yield on 10-year government debt of various nations below.
US 1.29%
Australia 1.34%
Canada 1.26%
France 0.04%
Germany -0.30%
Spain 0.34%
Italy 0.76%
Greece 0.75%
UK 0.61%
Japan 0.02%
European bonds yields are obviously artificially low due to the ECBs aggressive bond buying program of recent years, however the bond buying spree of late has been a global phenomenon. France yields plummeted this week, almost going negative. German 10-year debt currently returns a negative -.30% even before inflation. Even Spain whose economic downturn in 2020 is likely the worst of all European countries, only provides a 0.34% return on its 10-year government debt.
On a ten-year horizon, one would think that Gold would surely be a better investment than the incredibly low returns presented by bonds today, however gold still remains well and truly under owned. The ‘real yield’ on US 10Y treasuries today sits at -.90% adjusted for inflation, which is the most negative since February this year, whilst the gold market seems rather sluggish. Perhaps an opportunity yet; we imagine if we finally grind our way to new all-time highs in $USD the precious metals market will once again be reinvigorated.
So far, gold in $USD terms has been behaving in an encouraging manner, reclaiming the $1,800 psychological level. We also managed to hold above the key uptrend line that goes all the way back to May of 2019. For now, the long-term trend is still our friend. Momentum chasing US investors will likely come back into ETF markets the higher gold travels in the short-term and we expect somewhat of a recovery coming out of India after a recent absence. The next test for gold is to hold above this $1,800 level convincingly. Silver has been uncharacteristically very flat of late, without too much volatility.
GOLD DAILY CHART IN $USD
SILVER DAILY CHART IN $USD
In other news this week, Wells Fargo unexpectedly closed all existing personal credit lines. The revolving credit lines would usually allow users to borrow between $3,000 and $100,000 and were pitched as a way to consolidated credit card debt, pay for renovations or avoid overdraft fees. The shuttering of accounts will likely cause a lot of pain for many Americans who currently use the personal credit lines, but it could be a signal that the level of debt in general in the US economy is reaching somewhat of a peak.
The covid pandemic has led to the biggest build up in US government debt as a percentage of GDP since WW2. The Congressional Budget Office (CBO) recently made long term projections that US government debt could reach close to 200% of GDP in 2050, so the current trend is far from over.
Until next week,
John Feeney
Guardian Gold Sydney
If you have any feedback or questions about this report, you can contact John Feeney direct at johnf@guardianvaults.com.au
Or on Twitter @JohnFeeney10
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