Gold dips to signal real yields bottom – Morgan Stanley


The 10-year Treasury yield was 14% in 1984 and is now just half of one percent. For most of that time, dips in Treasury yields were a reliable indicator of economic weakness ahead. Today, that no longer seems to be the case. Lisa Shalett from Morgan Stanley believes this has important ramifications for portfolio construction and is closely watching falls in gold prices which would warn a bottom of real yields.

Key quotes

“Long-term government bonds may no longer be the best option for yield or capital preservation with rates so low. Indeed, the ‘real’ yield you stand to earn on a 10-year Treasury note is now negative one percent when inflation expectations of around 1.5% are factored in. Also, investors have grown accustomed to valuing equities based on their earnings potential relative to the yield on a Treasury. That method may not work as well going forward and could be fueling some of the excessive valuations we’re seeing now, especially in tech stocks.”

“Action by the Fed has so far proven effective at relieving the pandemic’s worst potential economic damage. That said, these policies can come at a cost. I’ve recently discussed high valuations in tech and other growth stocks. To this, I’ll add apparent excessive risk-taking in corporate credit markets, the rapid appreciation of commodities like gold, and the depreciation of the US dollar.”

“There is also potential for longer-term interest rates to move higher if inflation expectations continue to rise. Investors should watch for a potential dip in gold prices, which could signal that real yields are set to bottom.”

 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Feed news

Latest Forex News


Latest Forex News

Editors’ Picks

EUR/USD trades at fresh September lows

Risk-aversion is the main theme this Monday, amid resurgent coronavirus cases in the Old Continent and the announcement of  new lockdowns. ECB’s Lagarde said the economic recovery in the EU is “very uncertain, uneven and incomplete.”

EUR/USD News

GBP/USD extends slump sub-1.2800

The Pound plunged on a dismal market mood, as PM Johnson acknowledged the kingdom is undergoing a second coronavirus wave. GBP/USD trades at one-week lows around 1.2800.

GBP/USD News

XAU/USD bullish bias starting to fade

Gold prices are testing the bull's commitments at the support structure around $1,906 in what could be a final test before the next leg higher of the bullish trend.

Gold News

Bitcoin needs to defend critical support level at $10,600

Bitcoin was trading inside an ascending triangle pattern between September 3 and September 15, which is created when the price establishes higher lows and a horizontal trendline around the swing highs. 

Read more

WTI plummets to $39, down more than 4%

Crude oil prices closed the previous week sharply higher but erased a large portion of those gains on Monday. As of writing, the barrel of West Texas Intermediate was down 4.2%, the biggest daily percentage decline in nearly two weeks, at $39.15.

Oil News

Forex MAJORS

Cryptocurrencies

Signatures