DOVISH FED HAS CONTRIBUTED TO FALLING BOND YIELDS -- FALLING GERMAN YIELDS ARE ALSO HOLDING TREASURY YIELDS DOWN -- FALLING GLOBAL BOND YIELDS MAY ALSO EXPLAIN RECENT BUYING OF GOLD AND MINERS
TEN-YEAR TREASURY YIELD REMAINS WEAK ... Despite renewed optimism in the stock market which has had a spectacular start to the new year, Treasury yields remain surprisingly low. Chart 1 shows the 10-Year Treasury Yield ($TNX) still trading close to its lowest level in a year. The TNX also remains below its 50-day moving average (blue line) which remains below its 200-day average (red line). A big reason for low bond yields is the dovish turn taken by the Fed during January which dramatically reduced expectations for a rate hike this year. Fed fund futures show the probability of at least one rate increase in 2019 falling to 0.9%. That number was close to 90% last November. The probability of the Fed leaving rates unchanged this year has surged to 85.9% from around 10% four months ago. That dramatic change in expectations is also reflected in the steep drop in the 2-Year Treasury yield (upper box) from 2.95% at the start of November to its current reading of 2.50%. A more dovish Fed has given a big lift to stocks since the start of the new year. It's also helped boost bond prices along with dividend-paying stocks like consumer staples, utilities, and REITs during the current rally. Another possible explanation for low Treasury yields is the fact that foreign yields remain even weaker, and are holding Treasury yields down. That's especially true in Germany which is the biggest economy in Europe.
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Chart 1
GERMAN 10-YEAR YIELD HOLDS TREASURY YIELD DOWN... Like stocks, global bond yields are highly correlated. That means that they generally trend in the same direction. That's especially true among large developed economies like the U.S. and Germany, which is the biggest economy in Europe and fourth largest in the world. Falling German yields are leading a decline in bond yields in Europe which is impacting the direction of Treasury yields in the states. The blue line in Chart 2 shows the 10-Year German bond yield falling to 0.10% as of yesterday which is the lowest level in two years. That puts it dangerously close to falling into negative territory. The two year German yield is already in negative territory at -0.56%, as are several other rates in Europe. That reflects weaker economic conditions in that region. Lower foreign yields increase the demand for higher yielding Treasury bonds and help keep Treasury yields down (green line). Which also suggests that low Treasury yields are more reflective of weaker economic conditions in Europe (and Asia) than in the U.S. [The scale in Chart 2 is designed to show the close correlation between German and Treasury yields, but doesn't fully reflect the wide spread between the two which is currently 2.55%.]
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Chart 2
FALLING BOND YIELDS MAY ALSO BE BOOSTING GOLD ... The weekly bars in Chart 3 show the price of gold rallying yesterday to the highest level since last April and in an apparent bottoming formation, That can be seen by its rising bottoms in late 2016 and mid 2018 and its two peaks in mid-2016 and early 2018. The gives the chart the look of an "ascending triangle" which is usually a bullish pattern. A close over 1369 would constitute a major bullish breakout for the yellow metal. The solid brown line also shows gold doing better than stocks since last October. That suggests that investors started buying gold during the fourth quarter as a hedge against an aging bull market in stocks which is nearing its tenth anniversary in March. And continue to do so despite this year's impressive stock rally. Gold isn't getting much help from the U.S. dollar which has been rallying of late (although it has dipped over the past couple of days). Which brings us to another possible reason for recent gold buying, which is the drop in global bond yields.
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Chart 3
FALLING BOND YIELDS HELP BOOST GOLD ... Chart 4 shows that the sharp upturn in the price of gold (brown bars) since last November has coincided with a sharp in German (blue line) and Treasury bond yields (green line) over the last four months. That makes economic sense. Gold doesn't pay any interest. But it competes with higher yielding assets for investor attention. Rising bond yields reduce the appeal of gold; falling bond yields increase its appeal (as they're doing now). That's why I strongly suspect that falling global bond yields may be one of the main driving forces pushing gold prices higher.
Chart 5 compares gold to the 10-Year Treasury yield (green area) over the last four years. The chart shows gold doing worse when Treasury yields are rising (like late 2016 and the first half of 2018); but gold has done better when bond yields are dropping (like the first half of 2016 and 2017, and the four months since last November). Gold miners are also benefiting from the rise in gold.
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Chart 4
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Chart 5
GOLD MINERS ETF ALSO LOOKS STRONG ... Gold miners usually rise along with the metal. And that's just what they're doing. The weekly bars in Chart 6 show the VanEck Gold Miners ETF (GDX) surging this week to the highest level in nearly a year. The GDX appears headed for a test of the high formed during the first quarter of last year. Chart 6 shows gold miners rallying strongly during the first half of 2016 (along with the metal), before weakening again. After consolidating between the start of 2017 through the summer of 2018, miners appear to be back in rally mode. The solid line is a ratio of the GDX divided by the S&P 500, and it's been rising since last October. That's the first time since early 2016 that gold miners have done better than the stock market. The fact that miners are also rising faster than the metal is another positive sign. That's because gold miners usually rise faster than the metal during an uptrend. After being out of favor since 2011, gold and its miners are back in favor. For whatever the reasons, it looks like global investors have started looking for an alternative to stocks and bonds. And they've started prospecting in gold.
