Fixed Income Archives - Page 5 of 16

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

May 26, 2015

Inflation steady while Gold tests support

CPI continues below zero, but core CPI (excluding food and energy) came in at 1.81% for April 2015, indicating long-term inflationary pressures are constant.

CPI and Core CPI

Low inflation relieves upward pressure on bond yields. The yield on 10-year Treasury notes encountered resistance at 2.25%, with tall shadows on the last 3 weekly candles. Expect another retracement to test support at 1.85%. Reversal of 13-week Twiggs Momentum below zero would strengthen the signal.

10-Year Treasury Yields

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

The Dollar Index broke resistance at 96 despite falling bond yields, indicating the correction is over and another test of 100 likely. 13-Week Twiggs Momentum is declining, but recovery above the descending trendline would support the (bull) signal. Reversal below 96 is unlikely, but would test support at 93.

Dollar Index

Gold

The inflation-adjusted price of gold (gold/CPI) suggests that gold has further to fall. Unusually high levels of intervention by central banks in financial markets may, however, be fueling support at current prices — suggesting a gradual decline rather than a sharp adjustment.

Gold/CPI

Spot gold is headed for another test of medium-term support at $1180/ounce after respecting resistance at $1220. Breach of support would test the primary level at $1140. 13-Week Twiggs Momentum peaks below zero suggest a primary down-trend. Failure of $1140 would test the long-term target of $1000*.

Spot Gold

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

May 18, 2015

T-Bonds Burn, RBA Minutes Next

From Adam Button on AshrafLaidi.com:

…..The direction of the bond market in recent weeks has been a major driver but what was notable on Monday was the divergence. Bund yields were up 2.5 basis points while 10-year Treasury yields were up 9 bps.

This might be the start of a new stage for bonds. In the rout, everything was being thrown overboard but now market participants are looking through the wreckage to decide what’s worth keeping. Ultimately, the ECB is still buying 60 billlion euros of bonds per month and that may keep bund yields pinned, at least relatively.

Read more at T-Bonds Burn, RBA Minutes Next.

April 30, 2015

GDP, the Dollar and Treasury yields

Interesting to see how Treasury yields and the Dollar reacted — or failed to react — to the sharp fall in first quarter GDP growth. But first a great summary by Matt Phillips at Quartz:

Move along. There’s nothing to see here.

Well, if you must know, US GDP growth fell to a 0.2% annualized rate, which looks pretty bad.

We told you it would be bad. How did we know? Windows. If you looked out any of them between January and March you were treated to a slush-bound hellscape of icy misery. Thankfully, spring has sprung. And there are all sorts of indications that US growth is bouncing back.

…interpreting the numbers rather than simply informing readers of the latest “bad news”. Good journalism.

Ten-year Treasury Note yields broke resistance at 2.00%. Not what one would expect if the economy was slowing and the Fed planned to sit on its hands rather than raise interest rates. Breakout above resistance indicates an advance to 2.25%. Recovery of long-term yields, however, is likely to be gradual, with much testing of support before we see a breakout above long-term resistance at 3.00%.

10-Year Treasury Yields

The Dollar Index surprised in the opposite direction, breaking support at 96. Not what one would expect if yields are rising. Breach of support suggests a test of the primary trendline at 92.

Dollar Index

April 23, 2015

Inflation and Dollar stable

March CPI readings were much as expected, with the annual rate at zero but core CPI (excluding food and energy) close to the Fed target of 2 percent.

Core CPI

Ten-year Treasury Note yields continue to consolidate in a narrow band between 1.85% and 2.00%. Breakout above resistance is more likely and would offer a target of 2.25%. 13-Week Twiggs Momentum below zero continues to indicate a primary down-trend. Recovery of long-term yields is likely to be gradual for two reasons:

The Fed is adopting a cautious stance towards lifting short-term rates; and
Downward pressure exerted on long-term yields by offshore (Chinese & Japanese) purchases of Treasury securities (with the intent of suppressing appreciation of their exchange rates).

10-Year Treasury Yields

A stable inflation rate and low interest rate outlook have kept the Dollar Index range-bound between 96 and 100. Rising 13-week Twiggs Momentum continues to indicate a strong primary up-trend. Breakout above 100 would signal an advance to 110*. Failure of support at 96 is unlikely.

Dollar Index

* Target calculation: 100 + ( 100 – 90 ) = 110

April 21, 2015

Dearth of capital investment

Interesting graph from RBA governor Glenn Stevens.

A striking feature of the global economy, according to World Bank and OECD data, is the low rate of capital investment spending by businesses. In fact, the rate of investment to GDP seems to have had a downward trend for a long time.

One potential explanation is that there is a dearth of profitable investment opportunities. But another feature that catches one’s eye is that, post-crisis, the earnings yield on listed companies seems to have remained where it has historically been for a long time, even as the return on safe assets has collapsed to be close to zero …..

US Australia Yields

Perhaps this is partly explained by more sense of risk attached to future earnings, and/or a lower expected growth rate of future earnings.

Or it might be explained simply by stickiness in the sorts of “hurdle rates” that decision makers expect investments to clear. I cannot speak about US corporates, but this would seem to be consistent with the observation that we tend to hear from Australian liaison contacts that the hurdle rates of return that boards of directors apply to investment propositions have not shifted, despite the exceptionally low returns available on low-risk assets.

What this illustrates is the limits of monetary policy to restore economic growth.

Such [monetary] policies are, then, working through the channels available to them to support demand. But these channels are financial in nature. They don’t directly create demand in the way that, for example, government fiscal actions do……

April 15, 2015

Gold Dollar pause

Long-term Treasury yields remain in a bear trend, with 10-year yields holding below resistance at 2.00%. Breach of support at 1.85% would signal another test of the primary level at 1.65%. A lower inflation outlook is translating into lower interest rate expectations.

10-Year Treasury Yields

The Dollar Index is likewise encountering resistance at 100. Breakout would signal an advance to 104*. Reversal below 96, however, would test primary support at 94.

Dollar Index

* Target calculation: 100 + ( 100 – 96 ) = 104

Gold is also consolidating, ranging between $1180 and $1220/ounce. Reversal below $1180 would signal a decline to $1000/ounce*, while breakout above $1220 would indicate a rally to $1300/ounce.

Spot Gold

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

April 4, 2015

Gold tests resistance as the dollar falls

Ten-year Treasury Note yields are testing support at 1.85% after consolidating below 2.00% for 2 weeks. 13-Week Twiggs Momentum below zero continues to indicate a primary down-trend. Failure of support at 1.85% would test primary support at 1.65%.

10-Year Treasury Yields

Correction on the Dollar Index has lasted 3 weeks but continues to respect the first line of support at 95.50. Rising 13-week Twiggs Momentum also continues to indicate a strong (primary) up-trend. Recovery above 100 is likely and would offer a target of 110*.

Dollar Index

* Target calculation: 100 + ( 100 – 90 ) = 110

Gold is testing resistance at $1200/ounce on the back of softer interest rates and a weak dollar. Breakout above $1220/ounce would indicate a rally to $1300. But 13-week Twiggs Momentum below zero continues to indicate a primary down-trend. Respect of $1300, or reversal below $1180 would suggest another test of primary support at $1140/$1150.

Spot Gold

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