US Treasuries Sell-Off Gathering Pace

The gold price got whacked once again yesterday, with traders scrambling to buy equities. “Who needs safe havens?” seems to be the dominant market sentiment at the moment. The yellow metal is also suffering from firmness in the US dollar, which – contrary to the usual so-called “risk on” patterns we’ve seen in recent years, when the dollar sells off when equities rise – is holding at around 80 on the USDX. This is creating additional headwinds for gold, which usually performs best when confidence in the world’s reserve currency is falling.

Silver also had an off day yesterday – falling below an important zone of buying support from $32.50-$33. The Federal Reserve’s cautious “no more QE yet” comments on Tuesday have hurt the metals in the short-term, but with inflation expectations in America rising – and with zero-chance of the Fed getting ahead of inflation by jacking interest rates up to give savers real returns – the monetary landscape in America remains bullish for precious metals. This will remain the case as long as the US government is committed, unofficially at least, to inflating away the country’s mammoth debts.

But while things may be hunky-dory for the Fed in terms of the stock market and improving economic statistics, the bond market is the fly-in-the-ointment. “Is the bond market’s Arab Spring upon us?” Business Insider asks, following another torrid day for US Treasuries yesterday. The yield on 10 year Treasuries stood at 2.04% at the start of trading on Monday; by the close of play yesterday, it had had risen to 2.27%. The yield on the 30-year bond settled at 3.41% – up from around 3.17% on Monday.

These are of course still paltry yields in the context of decadal averages in these assets, and many financial commentators have got burned in recent years predicting blood in the bond market. While all common sense and rationality tells us that yields on Treasuries must rise given the deteriorating state of US public finances, yields remain very depressed by historical standards – as can be seen from the chart below that tracks the 10-year yield back to 1963.

The old adage “the market can remain irrational longer than you can remain solvent” has applied very well to the Treasury market in recent years – with the bulls helped of course by the Fed’s drastic open market operations since 2008, with the Fed owning more than 40% of the maturing Treasuries for certain years.

This market bears close attention. Are the bond vigilantes at last making an appearance?