Massive Move Out of Bonds; Implications for Gold

Oct.23.06 | About: SPDR Gold (GLD)

Today, the yield on U.S. Treasury debt has increased +3 to +4 basis points across the time horizon. But over the past month, the move in yields has been a massive +9 to +17 bp, which means that bond money is rapidly becoming equity money.

Here is the rate table today (click for larger image):

Interest Rates Table

Here is it at Friday’s close, as published in the WIR (click for larger image):

Rates Table

If bonds are selling down so quickly, that’s usually a sign that rates are rising to combat inflation. So why is the $USD in rally mode, and precious metals getting hammered?

This makes no sense in the long-run but in the short run it must mean that bond traders now believe that the Fed is going to raise this week.

But that probably should not cause yields on 30-year bonds to lift +11 bp this month -- just the T-Bill and short rates -- unless the bond traders actually now accept the refation scenario, and are no longer satisfied in the economic hard or soft landing thesis, which would cause rates to fall.

At least you will recall a month ago when I said that the bond rally was over. Those zero coupon bonds a well-known advisor recommended have been killed this month. As I said at the time, it’s too early.

BTW, the table published in this morning's Simply Economics by Econoday has dubious figures for the 3-month T-Bill yield. They said it closed Friday at 5.08 pct (10/20 prices; blue line), but it was 4.94 pct, as the WIR screenshot shows. The other numbers are accurate, I believe.

Yield curve

When you see the yield curve move up so quickly, it's a short-term downward pressure on gold prices. Longer-term, however, gold will move higher in price along with rising inflation, and therefore rising Treasury rates.