by Ivan Martchev

March 30, 2021

Having closed last week at 1.67%, the 10-year Treasury yield may very well be above 1.75% (its 52-week high) by the time you read this. With active overnight futures trading, both the stock and bond markets tend to go up or down when there is overnight interest from overseas investors.

I think the Fed will welcome a 10-year Treasury above 2% when it comes, but with caveats.

Here is why.

The last time we had a sharply rising 10-year yield was in 2018, but that was a very different type of rise.

US Government Bond

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In 2018, as this chart shows, the Fed was pushing rates up on both the long and short end by hiking the fed funds rate and shrinking its balance sheet simultaneously. It is doing no such thing right now.

The bond market is pushing long rates up for the Fed while its balance sheet is growing at $120 billion per month. Because the Fed does not want to do any tightening, even though it expects to see an uptick in inflation because of the pending reopening of the economy, I think the present rise in Treasury yields is welcomed by the Fed. I think they would prefer to see European and Japanese buying of Treasuries cap this rise, as their financial institutions do not have any such option in the local bond markets.

German 10-year bunds closed at -0.39% Friday while 10-year Japanese Government Bonds (JGBs) closed at 0.08%, so financial institutions should opt for the positive yields in the U.S. bond market right now.

US Dollar EURUSD

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Rising long-term interest rate differentials are pushing the U.S. dollar higher and they may push it even more if rates rise further, as I expect they will. Still, the question is how high inflation will go and if real interest rates (after inflation) will decline further. I do not believe real interest rates will rise significantly from here and they are likely to remain negative for some time, likely kept there by the Federal Reserve.

Gold Looks Pretty Good Right About Here

One way to gauge where real interest rates are going is to keep an eye on TIPs yields, which at last count were -0.69%. That reading means that the nominal 10-year Treasury yield has to rise by 69 basis points and inflation has to remain constant in order for real interest rates to turn positive.

Inflation is expected to rise, but in my view the Fed may intervene in the Treasury market somewhere in the 2.0% to 2.5% range, as it did during World War II, so it is entirely possible we won’t see positive real interest rates for some time, perhaps for much longer than the last time this happened, in 2012-13. I do not think we have seen the lows for real 10-yr yields, which may be in the negative 3-4% range, if not lower.

FRED Graph

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If real rates remain negative for a long while, as I expect, then I doubt gold bullion has major downside risk at present levels. Gold is down from last summer’s record $2,000+ highs and declined to levels last seen before COVID became a global pandemic in March 2020. With deficit spending off the charts, one could argue that the fundamentals for gold have rarely looked so good, yet we are $300 off the peak.

LME Index Gold

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

All of the other precious metals – silver, platinum and palladium – have been outperforming gold bullion of late, as their uses are primarily industrial in nature, and industrial metals are on fire in anticipation of the global reopening. A lot is hanging on this reopening being successful, yet recent developments from Europe and South America are not encouraging with a third COVID wave accelerating.

With multiple vaccines hitting the market, it would be reasonable to expect that COVID will be on the decline by the end of 2021.  Any other outcome would rattle both stock and bond markets globally.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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