Three Percent Yield Drives Gold Higher and Equities Lower
The yield on the 10-year Treasury notes climbed to 3% today, thefirst occurrence of a 3% rate since back in 2014.
On anindividual economic level, borrowingcosts will increase for loans on mortgages, automobiles, and consumer credit. On a corporate level, it will increase the cost of doingbusiness. Collectively, these increased costs will dampen the pace at which theeconomy is growing.
Therepercussions of higher interest rates for this benchmarkTreasury note were felt throughoutmultiple markets across a broad swath offinancial asset classes.
Marketsentiment quickly reacted to higher interest rates, putting substantialdownside pressure on U.S. equities while bidding up gold and silver pricing.
TheDow Jones Industrial Average traded over 600 points lower before recoveringslightly and logging a 424-point decline on the day. Closing at 24,024, the Dowlost 1.74%.
Accordingto MarketWatch, “Markets have been captivated by rising U.S. bond yieldsrecently, as the 10-year benchmark yield TMUBMUSD10Y, +0.60% tested thepsychologically important 3% threshold Tuesday. The rise in U.S. interest rateshas come as traders increasingly start to price in four interest-rate hikes in2018 from the Federal Reserve, rather than the three signaled by policymakers.”
Whilehigher yields on Treasury notes will have a negative impact on equities notdirectly tied to the banking sector, its impact on gold pricing could be bothbullish or bearish.
Higheryields will typically produce an increased appetite for the fixed income assetclass rather than safe-haven assets, suchas gold. At the same time, higher yields are indicative of growing inflation,which has a bullish effect on gold pricing.
Today,the news of 3% yields on 10-year notes, which was the underlying catalyst for today’sdramatically lower equities pricing, provided bullish tailwinds which helpedgold prices break their three-day losing streak. Gold pricing was also aidedtoday by a weaker U.S. dollar.
Goldfutures gained $9.20 in trading today, with the June 2018 contract currentlyfixed at $1,333.20.
Threeof the four precious metals gained in value today, with the exception of palladium which closed at $967 per ounceafter losing $11.70 in trading today, a 1.2% decline.
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