Category: Fixed Income

Treasury, municipal and corporate bonds

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Gold buying pressure

Long-term interest rates close to zero after inflation, with 10-year Treasury yields testing support at 2.0%, means that the opportunity cost of holding gold is minimal.

10-Year Treasury Yields

A weakening Dollar Index is expected to test primary support at 95, further boosting demand for Gold.

Dollar Index

Gold found short-term support at $1400 after a strong advance, indicating buying pressure. Respect of support at $1350/$1400 would offer a medium-term target of $1500/ounce.

Spot Gold in USD

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Gold lifted by rising Treasuries and falling Dollar

10-Year Treasury yields are testing LT support at 2.00% after falling 120 basis points (bps) since late last year.

10-Year Treasury Yield

Rising global uncertainty has caused a massive outflow from equity funds into bonds.

The Dollar Index penetrated its rising trendline, warning of a correction to test 95.

Dollar Index

Demand for Gold is boosted by lower bond yields and a lower Dollar. Spot Gold breakout above resistance at $1350 would signal a fresh advance, offering a medium-term target of $1500/ounce (short-term: $1400).

Spot Gold in USD

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Gold retreats as the Dollar strengthens

China’s Yuan fell sharply against the Dollar on imposition of tariffs by the US. Expect a test of primary support.

Chinese Yuan/US Dollar

The Dollar index strengthened. Follow-through above 98 would signal a fresh advance. The long-term target is 100.

Dollar Index

10-Year Treasury yields are testing support at 2.40%. Breach would offer a target of 2.20%. Rate hikes are a distant memory.

10-Year Treasury Yield

Gold continues to test medium-term support at $1280/ounce. The tall shadow on this week’s candle warns of selling pressure; as does the Trend Index peak at zero. Breach of support would signal a test of primary support.

Spot Gold in USD

Silver continues to fall, heading for a test of primary support at $14. Declining Trend Index peaks indicate selling pressure.

Spot Silver in USD

Gold is likely to follow.

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Silver leads Gold lower but safe haven demand rising

Silver has broken support at $15/ounce, warning of a test of primary support at $14. Declining Trend Index peaks indicate selling pressure.

Spot Silver in USD

Gold continues to test medium-term support at $1280/ounce. Precious metals tend to move together and Gold is expected to follow Silver in a test of primary support ($1180 for Gold).

Spot Gold in USD

The Dollar index, however, retreated below its new support level at 97.50. Penetration of the rising trendline would warn of a correction.

Dollar Index

China’s Yuan fell sharply against the Dollar as trade talks encountered major turbulence. The outlook for a trade deal now looks poor.

Chinese Yuan/US Dollar

10-Year Treasury yields are also falling as the prospect of further Fed rate hikes dims. Trend Index peaks below zero warn of strong demand for Treasuries (downward pressure on yields).

10-Year Treasury Yield

Failure to ink a trade deal is likely to boost demand for safe haven assets like the Dollar, Yen, Gold and US Treasuries. Capital flight from China may accelerate.

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Gold and Silver break support

The Dollar index retracement respected support at 97.50, confirming the advance. Follow-through above 98.00 would further strengthen the signal. Target for the advance is 100.

Dollar Index

10-Year Treasury yields penetrated the descending trendline, signaling that a base is forming around 2.50%. Rising troughs on the Trend Index also indicate support. Higher yields strengthen demand for Dollars.

10-Year Treasury Yield

The stronger Dollar is weakening demand for Gold. Declining Trend Index peaks warn of selling pressure. Spot Gold broke support at $1280/ounce, warning of a correction with a target of primary support at $1180.

Spot Gold in USD

Silver likewise broke support, at $15/ounce. Expect a test of primary support at $14.

Spot Silver in USD

The broad DJ-UBS Commodity Index continues to trend lower, in support of precious metals. Breach of primary support at 77 would warn of another decline.

DJ-UBS Commodity Index

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S&P 500: Beware the buyback blackout

We are now entering the blackout period when US corporates normally refrain from buying back stock, in the four to six-week period prior to their next earnings release. There is no outright ban on buybacks during that period but discretionary repurchases are restricted.

Zerohedge illustrates the extent to which stock buybacks are currently driving the market:

S&P 500 buybacks

Buybacks dwarf the $18 billion year-to-date inflow from ETF investors into US equities. The blackout period is likely to cause weakness.

10-Year Treasury yields also breached support at 2.60%, warning of a further decline in long-term interest rates. A sign of increased risk aversion.

10-Year Treasury Yields

Volatility on the S&P 500 has declined close to 1% but an upsurge in the next few weeks would warn of elevated risk. Breach of 2600 would indicate another test of primary support at 2350/2400.

S&P 500 & Twiggs Volatility

We extend our sympathies to the victims of the shooting in Christchurch and their families. Our hope is that this atrocity will draw people together in support of each other rather than divide them.

It has often been said that power corrupts. But it is perhaps equally important to realize that weakness, too, corrupts. Power corrupts the few, while weakness corrupts the many. Hatred, malice, rudeness, intolerance, and suspicion are the faults of weakness. The resentment of the weak does not spring from any injustice done to them but from their sense of inadequacy and impotence….
~ Eric Hoffer

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More signs of risk avoidance

Bloomberg: “U.S. stocks slid as investors grew anxious that the Trump administration won’t reach a trade deal with China before a March deadline for escalating the war. Treasuries surged.

The post-Christmas rally that added 16 percent to the S&P 500 came under increasing pressure amid reports the two trading partners remained far apart on a deal and that the nations’ presidents won’t meet before higher tariffs are slated to take effect on Chinese goods next month.”

S&P 500 volatility remains high. If the rally runs out of steam, a large Twiggs Volatility (21-day) trough above 1.0% would signal a bear market. Retreat below 2600 would reinforce the signal.

S&P 500

Crude prices retreated below resistance at $54/$55 per barrel, on fears of falling global (mainly Chinese) demand. Another test of primary support at $42/barrel is likely.

Light Crude

10-Year Treasury yields retreated to 2.65%. A Trend Index peak below zero warns of buying pressure from investors (yields fall when prices rise) who are looking for safety.

10-Year Treasury Yield

My conclusion is the same as last week. This is a bear market. Recovery hinges on an unlikely resolution of the US-China ‘trade dispute’.

The secret of happiness is freedom and the secret of freedom is courage.

~ Thucydides (460 – 400 B.C.)

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Treasury yields confirm bond bear market

10-Year Treasury yields respected their new support level at 3.00%, confirming a primary advance.

10-year Treasury Yield

Breakout above 3.00% also completes a double-bottom reversal, signaling the end of a three-decade-long secular bull market in bonds.

LT 10-year Treasury Yield

The yield differential between 10-year and 3-month Treasuries is declining but a flat yield curve does not warn of a recession. Only if the yield differential crosses below zero, with short-term yields rising faster than long-term, will there be a recession warning.

Real returns on long-term bonds — the gap between the green and blue lines below — remain near record lows.

1981 to 2018: 10-Year Treasury Yields and GDP Implicit Price Deflator

Only if the gap widens (real returns rise significantly) are we likely to see downward pressure on stock valuations, with falling price-earnings multiples.

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Yields rise but will stocks fall?

Yields on 10-year US Treasuries are again testing resistance at 3.0 percent. Breakout seems inevitable.

10-Year Treasury Yield

The long-term chart shows how breakout would complete a double bottom reversal, after a 3-decade-long secular bull market in bonds/down-trend in yields.

10-Year Treasury Yield - Quarterly

While most major stock market down-turns are caused by falling earnings expectations rather than revised earnings multiples, I do agree with Hamish Douglass that rising yields are likely to soften stock valuations.

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Warren Buffett: Bonds and portfolio risk

It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment ‘risk’ by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.

~ Warren Buffett, letter to the shareholders of Berkshire Hathaway – February 24, 2018

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