CRB COMMODITY INDEX ACHIEVES A BULLISH BREAKOUT BY REACHING A TWO-YEAR HIGH -- THAT HELPED PUSH THE TEN-YEAR TREASURY YIELD TO THE HIGHEST LEVEL IN THREE YEARS -- SO DID THE FACT THAT GERMAN AND AND BRITISH YIELDS TURNED UP THIS WEEK
CRB INDEX ACHIEVES BULLISH BREAKOUT ... A couple of messages during the week showed the Bloomberg Commodity Index nearing a two-year high. It broke through those highs during the week. Today's message shows the more widely-followed Reuters/Jefferies CRB Index accomplishing a bullish breakout of its own by rising to the highest level in more than two years. That confirms the view that commodity prices have not only bottomed, but are embarking on a new uptrend. A lot of that is tied to a weak dollar which fell to another three-year low this week.
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Chart 1
GOLD NEARS UPSIDE BREAKOUT ... Despite a setback on Thursday (following comments by President Trump that he favored a strong dollar), gold ended the week higher. The weekly bars in Chart 2 shows the continuous gold contract ending the week just shy of its September peak at 1362 and its mid-2016 peat at 1377. Technical odds favor those highs being eventually exceeded. That would complete a basing process in gold that has lasted four years. And it would add further support to a new uptrend in commodity prices. Crude oil hit another three year high this week. All commodity groups gained ground including energy, industrial and precious metals, and agricultural markets. Rising commodity prices are one of the factors that boosted the 10-year Treasury yield to another three-year high. Another factor pushing Treasury yields higher is rising foreign bond yields.
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Chart 2
TEN-YEAR TREASURY YIELD REACHES THREE-YEAR HIGH... The green weekly bars in Chart 3 show the 10-Year Treasury Yield rising to the highest level in three years. One of the forces pushing bond yields higher is the inflationary impact of rising commodity prices (solid area). It's no coincidence that both markets hit multi-year highs this week. That's because rising commodity prices historically have usually coincided with rising bond yields and falling bond prices. I know that because I've written three intermarket books on the subject. That close correlation is supported by the 20-week Correlation Coefficient (top of chart) which shows a high correlation reading of .76 between the two markets. That also explains why the dollar can fall while interest rates are rising. That's because a falling dollar is inflationary which pushes commodity prices and bond yields higher together. Another factor boosting Treasury yields is upside breakouts in foreign bond yields. Especially in Europe.
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Chart 3
GERMAN AND UK YIELDS ALSO BREAK OUT... Rising Treasury yields are also being supported by rising bond yields in foreign markets. The weekly bars in Chart 4 show the 10-Year UK Bond Yield rising above 1.40% for the first time in a year. The UK yield climbed 11 basis points during the week versus a smaller gain of 2 bps in the 10-Year Treasury. [That faster climb in the British yield helps explain why the British pound gained against the dollar]. Chart 5 shows the 10-Year German Bond Yield climbing 6 basis points last week to close above 0.60% for the first time in two years. That weekly gain was also bigger than the Treasury gain. [The fact that yields are rising in eurozone countries also helps explain the strong euro]. I keep reading that economists are puzzled as to why rising Treasury yields aren't boosting the dollar. The reason is that yields are also rising everywhere else. And, in some cases, even faster than Treasury yields. The Canadian 10-Year bond yield gained 28 basis points over the last month, outpacing a 25 basis point gain in Treasuries (and has reached a four-year high at 2.26%). That helps explain why the Canadian dollar is stronger than its U.S. counterpart. Up until recently, lower foreign bond yields acted as a weight on Treasury yields. Higher yields here attracted foreign money into Treasuries which boosted bond prices but held yields down. Rising foreign bond yields (and a falling dollar) have reduced the appeal of Treasuries. That's pushing Treasury bond prices lower and yields higher.
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Chart 4
