With stocks tumbling along with crude oil and the US dollar, the price of gold is surging, but this is what the world is nervously watching right now.
Biggest One Day Rise Since 2016
October 4 (King World News) – Here is a portion of what Peter Boockvar wrote today as the world awaits the next round of monetary madness: The rise in the 10 yr US yield yesterday was the biggest one day basis point rise since November 9th, 2016, the day after the election. While the hot knife thru butter move higher above the key 3.11% level came after the better than expected ADP and ISM reports, the rise had already begun following another selloff in Japanese and most European bonds (former is a new trend, latter as Italian bonds rallied). We are all in this bond move together and that continued overnight as Japanese 10 yr yield was up another 2 bps to .16%…
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Boockvar continues: The JGB 40 yr yield jumped by 4 bps to 1.12%. The German 10 yr Bund yield rose 5 bps yesterday and is up another 5.5 bps today. The 10 yr UK Gilt yield is higher by 8 bps after yesterday’s 5 bps rise and has broken out to its highest level since January 2016 at 1.66%. I continue to expect higher bond yields globally.
In a credit/debt dependent US economy, and global economy for that matter, there is no greater input than the cost of money. I have no idea when the next economic downturn comes but I’m very confident that when it does it will be triggered by a rise in rates that at some point hurts. Looking at this chart of the US 10 yr yield and it’s easy to see the possibility of it getting to 3.25-3.50% rather soon.
Expect 10-Year Yields To Continue Surging
I will list again the factors I believe are most impacting bonds/rates with updates:
1) Nominal GDP is running at a range of 4-6% depending on your estimates for the back half.
2) Inflation expectations are rising with the 10 yr inflation breakeven just 3.5 bps from the highest level since August 2014. Higher wages and now tariffs are helping to lift these bets. Also, the CRB index is back above 200 and at a 4 month high.
3) Huge Treasury supply to finance the growing deficits.
4) QT has increased to its max level of $50b per month, $600b annualized.
5) ECB QE was cut in half with an end in 3 months resulting in a rise in European bond yields. Also, Mario Draghi is now all of a sudden hawkish.
6) The BoJ has cut in half its QE program and now is more tolerant of a steepening of its yield curve.
7) Foreigners continue to be only very modest buyers of US Treasuries. The cost of hedging out dollar exposure has completely offset any yield pick up for Japanese and European investors.
8) Pension funds front loaded many of their longer term US Treasuries this year before the September 15th deadline of qualifying for a 35% tax deduction vs the now less generous 21%.
The rise in rates of course has not bothered at all stock market bulls as seen in yesterday’s II sentiment data and today’s AAII measure of the mood of the individual investor. AAII said Bulls rose 9.4 pts w/o/w to 45.7, the most since the middle of February. Bears fell by 6 pts to 25.1, the least in 5 weeks.
Bonds, Gold & Stocks
King World News note: It is interesting to watch the bloodbath in the bond markets, especially with commercials holding all-time record long positions in U.S. 10-Year Treasuries. Regardless, as Boockvar correctly points out, at some point the rise in interest rates will trigger some nasty downside action in global stock markets. Gold and silver should be the primary beneficiaries of a reversal in stocks.
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