What has been happening in the other asset classes? Look at the Gold and bond relationship over the last two months, markets participants have seen them go up or down in tandem. Since Aug., the ‘yellow metal’ has risen by around 10% and the Treasury’s 10-year yield, which moves inversely with Treasury prices, has fallen by nearly -15%. It is only this week that we have seen some decoupling of sorts.
There are a number of reasons why Gold has been well sought after, already managing to record an all time high this week. The easiest answer can be attributed to the weakness of the USD and the markets disdain for holding any of that currency. Secondly, by holding a hard asset like Gold, its strength is discounting higher inflation in the coming months and years. With the amount of liquidity that Cbanks have pumped into the financial system to keep it afloat, inflation or hyperinflation will eventually occur.
That been said, why have Treasury prices been strong? In either case if the Fed raised interest rates to combat inflation and provide support for the USD, yields can only go one way and that’s back up. With the Fed’s buy-backs about to cease, dealers will once again have more products to contend with. And we all know that dealers hate paying up for them!
Perhaps we are underestimating Bond dealers who are obviously discounting a weaker than expected economy and deflation. One of these scenarios has to give as they are not sustainable. With the US 10-year bond backing up 16bp this week, the FI asset class looks to be the loser. Equities continue to outperform, earnings are surprising (Intel, JPM), if they believed that deflation and economic vulnerability was persistent they would not be following commodity prices. Gold is performing well in an inflation environment. It would just perform as well in a deflation environment. Cash and especially Gold is always King!
On the Big picture front, Treasury buybacks are almost over. MBS buybacks have about $250b to go. The US Treasury still had to raise $1.8t per year (more pressure on the curve). The USD is at 14 month low. Analysts foresee 4% 10-yr notes before the year-end and 4.5% by middle of next year.
Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.
Dean Popplewell
He has a deep understanding of market fundamentals and the impact of global events on capital markets.
He is respected among professional traders for his skilled analysis and career history as global head
of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean
has played an instrumental role in driving awareness of the forex market as an emerging asset class
for retail investors, as well as providing expert counsel to a number of internal teams on how to best
serve clients and industry stakeholders.
Latest posts by Dean Popplewell (see all)
- Euro zone bond yields sink as German manufacturing slows - 24 July 2019
- How Boris Johnson Plans to Deliver Brexit in 100 Days - 24 July 2019
- Weak PMI’s Sink EUR - 24 July 2019