Once in a while, US bond markets give very important signals about the economy. After all, these bond yields regulate the borrowing cost of capital.
This week, the difference between short- and long-term borrowing cost has compressed to its lowest level in 11 years. Normally, long-term yields are higher than short-term ones. When short-term yields are very close to long-term yields, it means that the monetary policy may be too tight. And this always brings about a recession over the medium term. More worryingly for traders, the Fed may hike rates further in the December Fed meeting.
As a result, there was a large sell-off in equity markets. Investors did not like this ‘yield curve compression’ one bit. So they think the Fed will back off from raising rates aggressively in 2019 – and bought into long-term bonds. Look at the massive decline of the US 30-year bond yield. (yields and prices move inversely)
Interestingly, another safe haven asset investor bought into yesterday was gold. Prices jumped $20 in two days to $1,240. This raises the possibility of an upside breakout (see below). Meanwhile, Palladium is continuing to climb. It latest close of $1,225 is within striking distance of reaching gold parity. The clear laggard in the sector is Platinum. The metal is correcting below $800.
The above references the authors opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
Jackson has over 10 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world largest institutions and hedge funds. Jackson’s expertise include global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research. Jackson has a PhD in Finance from Durham University.