By Mike McGlone, Special Contributor to Kitco News
Friday June 10, 2016 08:02
(Kitco News) - What is different this time, as global sovereign debt yields continue to decline to record lows reducing the opportunity cost of investing in gold and silver?! It is unprecedented for US Treasury bond yields to decline before and after the commencement of a Federal Reserve (Fed) tightening cycle. Market participants might not always understand why treasury bond yields are moving in a particular direction, but generally have benefited by heeding the signals from the trend in increasing or declining yields – less so from rates. Short term interest rates are controlled by the Fed, bond yields by the market, except when the Fed is buying massive amounts of bonds with the intention of lowering yields, which is what they did with quantitative easing (QE). A recent historic signal that something was clearly different was in 2014, when the Fed ended QE3 and US Treasury bond yields declined, sharply. TLT, the widely traded US Treasury bond ETF, gained 27% in 2014. The most recent, potentially historic signal has been the sharp decline in US Treasury bond yields since the Fed tightening. TLT has tacked on another 12% since December 16th. Both were not supposed to happen according to the vast consensus of economists and market strategists. According to the US Treasury bond market, the next move from the Fed is more likely to be easing.
The best investment opportunities are often against consensus. The 2016 year so far has generally been against the consensus – gold, silver and US Treasury bonds have been among the best performers. Following an extended period of below historical average volatility, stock market volatility was way over due for some simple mean reversion - and still is. But, there are few more powerful forces to raise the tide for all assets than increasing US Treasury bond prices. So what then after US Treasury bond yields finally reach their new lower plateau? We are clearly still in the midst of that journey with the US Treasury 10yr currently near 1.65%, compared to 0.03% in Germany and negative 0.17% in Japan. That wide spread is a foundation of support for the US dollar, or has been. Despite the wide spread, the US Dollar index has declined about 5% in 2016. What potentially is a more powerful force is the trend in the spread. With much of the rest of the world’s sovereign debt yields near zero, declining US Treasury bond yields mean narrowing spreads and a weakening US dollar. Primary beneficiaries, should continue to be gold and silver. As gold awaits a catalyst to propel it above $1,300/oz. it may come simply from US Treasury bond yields to continue doing what they have been for the past few decades – declining. Note, this former treasury bond trader who started in the business trading T-bond futures at the Chicago Board of Trade in the 1980’s never dreamed of such low global bond yields, but the trend is your friend until proven otherwise.