Fixed Income Archives - Page 4 of 16

October 1, 2015

Gold and Treasury yields decline as inflation weakens

US inflation. Core CPI is hovering below 2.0 percent but the 5-year inflation breakeven (5-year Treasury yield minus TIPS yield) suggests that inflation will fall. The recent slow-down in average hourly manufacturing earnings growth (production and non-supervisory employees) may just be statistical noise, but decline of either of these signals below 1.0% p.a. would be cause for concern.

5 Year Inflation Breakeven

Treasury yields remain weak, with the 10-year yield testing support between 1.85 and 2.0 percent.

10-Year Treasury Yields

The Dollar Index continues to range between 93 and 98. Falling inflation would favor an upward breakout. But flight to safety could drive the Dollar up (and yields downward). The biggest factor that may the Dollar down (and yields up), however, would be a Chinese sell-off of foreign reserves (largely Treasury investments) — to support the Yuan and/or stimulate their economy.

Dollar Index

Spot gold is likely to test primary support between $1080 and $1100 per ounce. Declining 13-week Twiggs Momentum, with peaks below zero, signals a strong down-trend. Breach of primary support would offer a target of $1000/ounce*.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

September 24, 2015

Gold: No flight to safety

US inflation remains subdued with core CPI hovering below 2.0 percent.

Core CPI

Treasury yields remain weak, with the 10-year yield testing support between 1.85 and 2.0 percent.

10-Year Treasury Yields

That gives a real yield, after deducting core CPI, of close to zero on a 10-year investment.

10-Year Treasury Yield minus Core CPI

Abraham Maslow wrote in the 1960s: “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” His description certainly applies to the Fed who have used monetary policy extensively to fix a problem for which it was not intended. Interest rates were driven down to unsustainable levels, with questionable results. My concern is that maintaining rates close to zero for close to seven years could breed a host of unforeseen problems.

What is really needed is a Keynesian solution: government investment in productive infrastructure. But neither party is likely to succeed in winning approval for this.

The Dollar Index is ranging between 93 and 98. Increased interest rates or falling inflation would suggest an upward breakout. Flight to safety would drive yields downward. But the biggest factor that may drive up yields could be a Chinese sell-off of foreign reserves (largely Treasury investments) in order to support the Yuan or spend on infrastructure to revive their economy.

Dollar Index

There is no flight to the safety of gold as yet. The Gold Bugs Index, representing un-hedged gold miners, is testing primary support at 105. Twiggs Momentum (13 week) peaks below zero indicate a strong down-trend.

Gold Bugs Index

Spot gold fared a little better, but is likely to test primary support at $1080 per ounce. Again, declining 13-week Twiggs Momentum, with peaks below zero, signals a strong down-trend. Breach of support at $1080 would offer a target of $1000/ounce*.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

August 6, 2015

Dollar strengthens on low inflation

Core CPI continues to hover below the Fed’s 2.0% target, while plunging oil prices keep the broad index close to zero. Core CPI is likely to weaken as the beneficial effect of lower energy costs flows through to all sectors of the economy.

CPI and Core CPI

We often read of the threat of impending deflation — which may well occur. But one needs to differentiate between deflation caused by a surge in aggregate supply, as in the present situation, and a fall in aggregate demand as in 2008. The former may well act as a stimulus to the global economy, while the latter threatens a negative feedback loop between income and consumption which can lead to substantial falls in output.

Low inflation takes pressure off the Fed to raise interest rates but we can expect the first increment later this year. 10-Year Treasury yields respected the rising trendline and support at 2.10%, suggesting another test of 2.50%.

10-Year Treasury Yields

The higher trough on the Dollar Index indicates buying pressure and breakout above 98 would signal another test of 100. In the longer term, breakout above 100 would signal resumption of the primary up-trend but is likely to meet push-back from the Fed as a higher dollar would hurt both exporters and domestic producers competing against imports.

Dollar Index

August 6, 2015

Gold-Oil ratio warns of further selling

The Gold-Oil ratio, comparing the price of bullion ($/ounce) to Brent crude ($/barrel), has long been used as an indication of whether gold is in a bull or bear market. When the oil price is high, demand for gold, anticipating rising inflation, is normally strong. The current plunge in oil prices indicates the opposite: weak inflation and low demand for gold. Bullion prices are falling but not fast enough to keep pace with crude, driving the Gold-Oil ratio to an overbought position above 20. Expect a long-term bear market for gold.

Gold-Oil ratio

Spot Gold is consolidating in a narrow rectangle below $1100/ounce. This is a bearish sign, with buyers unable to break the first level of resistance. Breach of support at $1080 is likely and would signal a decline to $1000/ounce*. Declining 13-week Twiggs Momentum below zero confirms a strong primary down-trend.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

The Gold Bugs Index, representing un-hedged gold stocks, has fallen close to 30 percent since breaking support five weeks ago.

Gold Bugs Index

Barrick Gold, one of the largest global gold producers, is falling even faster.

Barrick Gold

If long-term crude prices continue to fall, like the June 2017 (CLM2017) futures depicted below, gold is likely to follow and support at $1000/ounce will not hold.

WTI Light Crude June 2017 Futures

July 14, 2015

Hint of Greek bailout revives rates (and the Dollar)

10-Year Treasury yields rallied on hint of a Greek bailout, although Tsipras still has to obtain approval from the Greek parliament. Breakout above 2.50% would offer an immediate target of 2.75% but the advance is likely to test major resistance at 3.00% in the longer term. Reversal below 2.25% is unlikely (unless there is a breakdown Greek/EZ negotiations) but would re-test the rising trendline at 2.10%.

10-Year Treasury Yields

The Dollar Index also rallied. Breakout above 97.5 would suggest another advance; confirmed if resistance at 100 is broken. Reversal below 93 is most unlikely but would warn of a primary down-trend.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

July 9, 2015

Gold Bugs warn of a bear market

Silver is testing long-term support at $15/ounce. Breach is likely, with 13-week Twiggs Momentum peaking below zero, indicating continuation of the down-trend.

Silver

Gold is similarly testing primary support at $1140/ounce. 13-Week Twiggs Momentum also peaked below zero, suggesting continuation of the down-trend. Breach of support would offer a target of $1000*.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

Stocks of major producers like Barrick Gold are also testing primary support. 13-week Twiggs Money Flow below zero indicates a primary down-trend.

Barrick Gold

The Gold Bugs Index, representing un-hedged gold stocks, has already departed. Breach of the band of primary support between 150 and 155 warns of a bear market for gold.

Gold Bugs Index

June 30, 2015

Gold, silver and the Dollar

A long-term chart of silver shows strong support at $15/ounce. Recovery above $18 and 13-week Twiggs Momentum above zero would suggest that the precious metal has bottomed. A bullish sign for gold.

Silver

The picture for gold is less clear, with further tests of primary support at $1140/ounce expected. 13-Week Twiggs Momentum is also rising and recovery above zero would be a bullish sign. But breakout above $1300 is unlikely at present. Breach of support at $1140 would offer a target of $1000*.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

Stocks of major gold producers like Barrick Gold remain bearish.

Barrick Gold

The Dollar Index respected its declining trendline, warning of another test of primary support at 93. Breach of support would signal a primary down-trend. A weaker Dollar would boost demand for gold and lift the US economy, enhancing the competitiveness of exporters and local manufacturers facing competition in domestic markets.

Dollar Index

Long-term interest rates are rising, however, and provide support for the Dollar. 10-Year Treasury yields respected their new support level at 2.25% and are likely to test long-term resistance at 3.0 percent. Rising 13-week Twiggs Momentum above zero, strengthens the signal.

10-Year Treasury Yields

June 17, 2015

Interest rates and inflation hurt gold prices

Where is inflation headed? The five-year breakeven rate (5-Year Treasury Yield minus 5-year TIPS) is hovering around 1.80 percent, close to the latest readings for core CPI. The market is anticipating low inflation for the next few years.

Five-year Breakeven Rate and Core CPI

Long-term interest rates are rising in anticipation of Fed tightening. 10-Year Treasury yields, in a primary up-trend, are retracing to test their new support level at 2.25%. Respect is likely and would signal an advance to long-term resistance at 3.0 percent. Rising 13-week Twiggs Momentum crossed above zero, strengthening the signal.

10-Year Treasury Yields

Gold

Low inflation reduces demand for gold as an inflation-hedge, while rising interest rates increase its carrying cost for speculators and the opportunity cost for investors. These factors are exerting downward pressure on gold prices. The spot price recovered above medium-term support at $1180/ounce, but the breach continues to warn of a test of the primary level at $1140. 13-Week Twiggs Momentum peaking below zero also suggests continuation of the primary down-trend. Failure of $1140 would offer a long-term target of $1000*.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

The Gold Bugs Index, representing un-hedged gold stocks, is testing primary support at 155. Breach of support would strengthen the warning.

Gold Bugs Index

June 9, 2015

Gold breaks $1180 support

Core CPI continues to track close to the Fed target of 2.0 percent (CPI All Items is distorted by falling oil prices).

CPI and Core CPI

Long-term interest rates are in a primary up-trend, with 10-year Treasury note yields breakout above resistance at 2.25% offering a target of 3.0 percent. Rising 13-week Twiggs Momentum above zero strengthens the signal.

10-Year Treasury Yields

The Dollar Index continues to test support at 95. Breach would warn of a test of the primary level (and rising trendline) at 93. A sharp decline on 13-Week Twiggs Momentum indicates this is likely.

Dollar Index

Gold

A weakening dollar would boost demand for gold, but rising interest rates counter this. Spot gold broke medium-term support at $1180/ounce, warning of a test of the primary level at $1140. 13-Week Twiggs Momentum peaks below zero suggest continuation of the primary down-trend. Failure of $1140 would offer a long-term target of $1000*.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

June 3, 2015

Treasury yields surge but Dollar falls

10-year Treasury yields broke through resistance at 2.25%, offering a medium-term target of 2.65%*. Breakout above primary resistance at 3.00% is remote at present, but would signal the end of the secular down-trend (bull market in bonds). It appears that bond investors are reducing their exposure in anticipation of this occurring. Expect retracement to test the new support level at 2.25%; respect would confirm the breakout. Rising 13-week Twiggs Momentum above zero also strengthens the signal.

10-Year Treasury Yields

* Target calculation: 2.25 + ( 2.25 – 1.85 ) = 2.65

The Dollar Index is retreating despite rising bond yields. Declining 13-Week Twiggs Momentum warns of a test of primary support at 93. Breach of medium-term support at 95 would strengthen the signal. Respect is less likely, but would suggest another test of 100.

Dollar Index