Tag: 10-Year Treasury Yields

Posted on

Gold Plunges

Key Points

  • Gold is trading at $4,230 per ounce, having breached primary support at $4,400.

Gold breached primary support between $4,400 and $4,600 per ounce, triggering further stop-loss selling.

Spot Gold

There are two primary reasons for the current sell-off:

  1. Gulf states are expected to liquidate reserves, including gold bullion, to support their finances as oil export revenues are curtailed.
  2. Long-term interest rates are rising in anticipation of an inflation spike caused by high energy prices from the Iranian blockade. High interest rates make bonds more attractive and reduce demand for gold.

Bullion sales will likely cause a temporary increase in supply, driving down gold prices until reserves are exhausted or Iran’s blockade of Gulf shipping ends. Demand is likely to increase thereafter as reserves are replenished.

Long-term Treasury yields are rising. Breakout of the 10-year yield above 4.3% indicates another test of resistance between 4.8% and 5.0%.

10-Year Treasury Yield

However, rising inflation and long-term interest rates will likely have less influence on gold demand because the two forces tend to offset each other. High inflation increases demand for gold as an inflation hedge, while high interest rates increase the opportunity cost of holding gold and suppress demand.

Our long-term bullish outlook for gold is based on the belief that precariously high US debt levels will eventually force the Fed to suppress long-term interest rates.

US federal debt jumped to $38.5 trillion at the end of 2025.

Federal Debt

The ratio of federal debt to nominal GDP is at an unsustainable 122.5%.

Federal Debt to Nominal GDP (%)

Moreover, the fiscal deficit will likely exceed $2 trillion for the current fiscal year. The deficit for the 5 months to February 2026 is at $1 trillion, but the next few months are about to blow a big hole in the budget.

Federal Deficit

First, the US Supreme Court has ruled that tariffs implemented by the Trump administration exceed the President’s constitutional powers, and most of the $144 billion in Customs Duties collected will need to be refunded.

Second, the newly renamed Department of War is about to present Congress with a $200 billion bill for the US war on Iran, so far. The war is only three weeks old, and the final bill will likely be a lot higher.

Third, rising energy prices threaten to crash the stock market. A crash would substantially reduce capital gains, a major component of Individual Income Tax revenue.

Finally, rising interest rates will further widen the ballooning deficit, with accelerating government debt-to-GDP ratios raising risk premia, which in turn drive interest rates even higher.

The Federal Reserve would be forced to prioritise the faltering US Treasury over the Dollar, thereby sacrificing its mandate to maintain price stability. Long-anticipated fiscal dominance would mean the Fed suppresses long-term yields to improve the Treasury’s ability to service its debt. The resulting sharp rise in inflation would undermine the Dollar and boost demand for gold and other inflation hedges.

Conclusion

We expect gold to test support at $4,000 per ounce.

However, our long-term outlook for gold remains bullish, with ballooning budget deficits and fiscal dominance likely to cause a steep rise in inflation and erode the purchasing power of the Dollar.

 

Acknowledgments

Posted on

Rising recession risk threatens bond market

Summary

  • Trade talks with China have stalled
  • President Trump announces steel and aluminum tariffs will increase from 25% to 50%
  • Input costs for US manufacturers are expected to soar
  • Spending is expected to slow after the introduction of tariffs in April
  • The economic outlook is clouded with uncertainty, and the risk of a recession is rising

President Trump accused China of “totally violating its agreement” with the United States last week. (Reuters)

The Geneva agreement concluded between Treasury Secretary Bessent and his Chinese counterpart called for a 90-day pause in increased tariffs and for China to lift restrictions on exports of critical materials such as rare earths needed for semiconductor, electronics, and defense applications.

According to a US trade representative, the Chinese are moving slowly on granting export licenses for critical materials. The automobile industry is already warning that shortages of rare earth magnets could halt production in a matter of weeks.

The Chinese slow-walking of export licenses appears to be retaliation for the US last week imposing license requirements, and revoking some licenses, for exports of design software and chemicals for semiconductors, butane and ethane, machine tools, and aviation equipment.

In another blow to the auto industry, President Trump announced that he will increase tariffs on steel and aluminum imports from 25% to 50%. Steelmakers are expected to benefit from higher domestic prices, boosting output, but automobile manufacturing, heavy engineering, and construction industries will likely bear the costs.

Steel exports from Canada and Mexico will be most affected, but South Korea, Germany, and Brazil are also expected to suffer. The EU has threatened retaliatory measures if the issue cannot be resolved.

Aluminum imports are likely to continue despite the increased tariffs. Bauxite and electricity are the two primary input costs of smelters, and domestic US smelters will struggle to match the low-cost hydroelectric power of global competitors.

Financial Markets

The S&P 500 is testing the band of resistance at 6000, but short weekly candles indicate hesitancy.

S&P 500

Strong liquidity supports financial markets, with the Chicago Fed National Financial Conditions Index falling to -0.606, signaling easy monetary conditions.

Chicago Fed National Financial Conditions Index

10-year Treasury yields are testing support between 4.4% and 4.5%, but the weak dollar warns of capital outflows that are expected to send long-term yields higher.

10-Year Treasury Yield

JPMorgan CEO Jamie Dimon says, “You are going to see a crack in the bond market. It is going to happen…. I’m telling you it’s going to happen….”

Economy

Former Fed economist Dr Lacy Hunt warns that the US economy is slowing, with a higher than 50% probability of recession. He warns that the economy is far weaker than generally understood, and what markets are not considering is that spending brought forward to front-run tariffs is likely to cause a sharp drop in spending in the next few months.

A recession would also cause the fiscal deficit to increase sharply, by at least another 2.0% of GDP, adding further stress on the bond market.

The ISM manufacturing PMI declined to 48.5% in May, indicating a long-term contraction.

ISM Manufacturing PMI

Manufacturing inventories surged in March as manufacturers brought forward purchases to get ahead of April’s tariff increases.

ISM Manufacturing Inventories

Imports also surged in the first quarter, followed by a steep plunge in May.

ISM Manufacturing Imports

Exports are contracting at a similar rate.

ISM Manufacturing Exports

Prices is the only sub-index that has surged, warning of steeply rising input costs.

ISM Manufacturing Prices

Crude Oil

OPEC+ decided to increase production targets by 411.000 barrels per day in July, which is equal to the increases in May and June.

However, in a sign of shrinking global trade, China’s seaborne imports declined by more than a million barrels per day in May. Kpler estimates imports at 9.43 mbpd compared to 10.46 mbpd in April and 10.45 mbpd in March. (Reuters)

Brent crude is likely to re-test support at $60 per barrel, and breach would offer a target of $50.

Brent Crude

Dollar & Gold

Capital outflows are weakening the dollar. The US Dollar Index has broken support at 100, and follow-through below 98 would confirm another decline with a target of 90.

Dollar Index

Gold rallied to test the band of resistance at $3,400 per ounce. A breakout above $3,500 would strengthen our target of $4,000 by the end of 2025.

Spot Gold

Conclusion

Due to high levels of uncertainty, consumers and corporations are expected to defer capital expenditures in the months ahead. The drop in spending is likely to be accelerated by the build-up in inventories and the bringing forward of expenditures to get ahead of tariff increases in April.

Contracting imports and exports in the manufacturing sector warn that the economy will slow. Falling crude oil imports in China paint a similar outlook, suggesting a global recession.

A recession would increase the deficit and further stress the bond market, which is already concerned about spiraling debt levels.

A falling dollar and rising gold price warn of capital outflows from US financial markets. JPMorgan CEO Jamie Dimon tells us to prepare for a coming crack in the bond market. That would mean higher long-term yields and sharply lower stock prices, likely boosting demand for gold even higher.

Acknowledgments

Posted on

Signal vs Noise

Summary

  • The signal-to-noise ratio is exceedingly high, with market volatility obscuring the underlying trend.
  • Ignore the background noise of Trump policy flip-flops and focus on the effect of rising fiscal debt and long-term interest rates.

The S&P 500 is consolidating below 6000, a bullish sign. A breakout above 6100 would signal another advance, but the index has become a poor leading indicator of the economy. Instead, it is dominated by large passive investment flows into index ETFs, surges in liquidity, and the media cycle, which attempts to parse President Trump’s intentions by his daily sermon from the mount of Truth Social.

S&P 500

The bond market takes a longer-term view and is far more prescient than the equity market. Ten-year Treasury yields are gradually rising as international investors slowly withdraw, without wanting to trigger a panicked rush for the exits. Respect of the 50-week weighted moving average would signal another test of resistance at 4.75%.

10-Year Treasury Yield

The dollar is weakening, with the US Dollar Index testing the band of support between 98 and 100. A breach of 98 would warn of another decline, confirming our target of 90.

Dollar Index

Gold is in a strong uptrend, reflecting the same outflow from US capital markets, with a bullish consolidation below 3400 on the weekly chart below. Breakout above 3500 would strengthen our target of 4000 by the end of 2025.

Spot Gold

Consumers

A rebound in consumer confidence buoyed stocks, but the May reading of 98 remains in the same range as the 2020 COVID pandemic.

Conference Board: Consumer Confidence

Consumer expectations rallied to 72.8, but remains below the threshold of 80, which typically warns of a recession ahead.

Conference Board: Consumer Expectations & Present Situation

Economy

Manufacturers’ new orders for non-defense capital goods, excluding aircraft, were below their 2022 peak, at $74.8 billion in April.

Manufacturing New Orders: Non-Defense Capital Goods Excluding Aircraft

That seems pretty healthy, until we adjust for inflation. The chart below, adjusted by the producer price index for capital equipment, warns of a sharp decline in new orders that could easily reach its 2008 low if current instability continues. Corporations are likely to defer decisions on new capital spending until there is a stable outlook.

Manufacturing New Orders: Non-Defense Capital Goods Excluding Aircraft/PPI for Capital Equipment

Conclusion

Ignore the background noise of policy flip-flops and focus on the underlying signal in capital markets. Heightened uncertainty has triggered a steady capital outflow. If you destroy a brand—the USA bastion of democracy and economic stability—it is practically impossible to restore it.

The situation is aggravated by corporations deferring orders for new capital equipment because of the uncertainty. Declining capital investment is likely to tip the economy into recession.

Acknowledgments

Posted on

Rising long-term rates could spoil the party

Real GDP for the September quarter reflects an annual growth rate of 2.9% for the US, well below the Atlanta Fed GDPNow estimate of 5.4%. Growth in weekly hours worked declined to 1.5% for the 12 months ended September, indicating that GDP is likely to slow further in the fourth quarter.

Real GDP & Estimated Total Weekly Hours

New Orders

Manufacturers’ new orders for durable goods, adjusted for inflation, shows signs of strengthening.

Manufacturers' New Orders: Durable Goods

Transport

Transport indicators show a long-term down-trend but truck tonnage has grown since May 2023.

Truck Tonnage

Container (intermodal) rail freight likewise grew for several months but then turned down in August..

Rail Freight

Growth in weekly payrolls of transport and warehousing employees slowed to an annual rate of 3.6% in September but remains positive.

Transport & Warehousing Weekly Payrolls

Consumer Cyclical

Light vehicle sales continue to trend higher, suggesting consumer confidence.

Light Vehicle Sales

Housing

New housing starts (purple) have been trending lower since their peak in 2022 but new permits (green) are now strengthening.

Housing Starts & Permits

New single family houses sold are trending higher.

New Home Sales

Despite a steep rise in mortgage rates. In a strange twist, higher rates have reduced the turnover of existing homes on the market, with owners reluctant to give up their low fixed rate mortgages. Low supply of existing homes has boosted sales of new homes, lifting employment in residential construction.

30-Year Mortgage Rate

The National Association of Home Builders Housing Market Index (HMI), however, reflects falling sentiment — likely to be followed by declining new home sales and housing starts.

NAHB/Wells Fargo Housing Market Index

HMI is a weighted average of three separate component indices. A monthly survey of NAHB members asks respondents to rate market conditions for the sale of new homes at the present time; sales in the next six months; and the traffic of prospective buyers. (NAHB)

Financial Markets

The ratio of bank loans and leases to GDP declined to 0.44 in the third quarter but remains elevated compared to levels prior to 2000.

Bank Loans & Leases

The cause of ballooning debt is not hard to find, with negative real interest rates for large parts of the past two decades.

Real Fed Funds Rate

Now real rates are again positive and money supply is contracting relative to GDP, the days of easy credit are at an end. A significant contraction of credit is likely unless the Fed intervenes, either by cutting rates or expanding its balance sheet to inject more liquidity into the system.

M2 Money Supply/GDP

Commercial banks continued to raise lending standards in Q3, making credit less accessible.

Bank Lending Standards

Conclusion

This is not a normal market cycle and investors need to be prepared for sudden shifts in financial markets.

The US economy is slowing but cyclical elements like light vehicle sales and new home sales are holding up well.

The rise in long-term Treasury yields, however, is likely to cause a sharp credit contraction if the Fed does not intervene by cutting rates or expanding its balance sheet (QE).

10-Year Treasury Yields

The Fed is reluctant to intervene because this would undermine their efforts to curb inflation. But they may be forced to if there is a credit event that unsettles financial markets.

Moody's Baa Corporate Bond Yield minus 10-Year Treasury Yield

Fed intervention is unlikely without a steep rise in credit spreads. But would be especially bullish for Gold.

Powered by WordPress / WordPress Maintenance Service By Website Helper