Gold Vs. 10 Year U.S. Bond Yield

This page is created to monitor the Gold Price Vs. Bond Yields.

Historically, when the 10 Year U.S. Bond Yield declines (red chart), gold will have an up move (blue chart).

The red chart is actually the equivalent of the TIPS yield (Treasury Inflation Protected Securities), which is the Treasury Yield of U.S. Bonds minus the rate of expected inflation. The correlation between TIPS and gold is best visible when we invert the TIPS yield. Source: blog.yardeni.com

Correlation: 30 Yr. Treasury Yield Vs. 30 Yr. Mortgage Rates

Just wanted to add another couple of correlations to my collection. We will learn about fixed and adjustable rate mortgages. These are correlated against treasury yields and fed funds rate respectively.

1) Conventional (Fixed) Mortgage Rate Vs. Treasury Yields

As you can see mortgage rates are always higher than treasury yields because U.S. treasuries are considered much safer than mortgages.

Chart 1: 30 Yr. Treasury Yield Vs. 30 Yr. Mortgage Rate

2) Adjustable Mortgage Rate Vs. Fed Funds Rate
Adjustable Rate Mortgages on the other hand are linked to the Fed Funds Rate.

Chart 2: 1 Yr. Adjustable Rate Mortgage Vs. Fed Funds Rate

Correlation: P/E ratio Vs. Bond Yields

A few months ago I said that the P/E ratio would go up when bond yields go down. Apparently today, I read on Zerohedge that it is not black and white. This is only true for yields above 3%.

When we go lower than 3%, the correlation reverses. This is very interesting…

Chart 1: Yields Vs. P/E Ratio

Correlation: Fed Funds Rate Vs. 10 Year Bond Yields

Another correlation Azizonomics taught me is the Fed Funds Rate Vs. 10 Year Bond Yield (Chart 1).

As long as the federal reserve keeps interest rates at zero, there is no way the 10 year bond yield will go up.

Chart 1: Fed Funds Rate Vs. 10 Year Bond Yields

If you think about this, we have 2 forces. One is debt growth (Chart 2), which is skyrocketing and the other one is the fed funds rate (Chart 1) which is at historic lows. Debt growth induces higher bond yields and low interest rates are inducing lower bond yields. I wonder which force will eventually win.

Chart 2: Public Debt Growth Vs. 10 Year Bond Yields

If the Federal Reserve even thinks about setting higher interest rates, the bond market will immediately collapse!

Correlation: 10 Year Bond Yields Vs. Total Public Debt Growth

Azizonomics taught me another correlation. When debt grows faster (red line goes up), normally the treasury yield should go up.

But from year 2000 onwards it didn’t happen. Either the treasury yields should go up, or the debt growth should slow down.

Chart 1: Federal Debt Growth Vs. 10 Year Bond Yields

China Ups U.S. Bond Holdings

Surprisingly, China bought even more U.S. bonds and is now again the champion, just before Japan. Almost every foreign country increased its U.S. bond holdings in December 2012.

And now realize they are making a loss on that purchase as yields went up.

Chart 1: China U.S. Treasury Holdings

U.S. Bond Market About to Implode

I just wanted to give an update on the status of the U.S. treasury market. I warned about a bond bubble here, stating that short interest in the commercials was going up dramatically. The last months we have seen weakness in the bond market as a result, but if you think it’s already over, I have to disappoint you.

The bond bubble collapse hasn’t even started yet. On Chart 1 we can see that since that article, the net short positions for the commercials has even gone up (pointing to a weak bond market and a bottoming out of yields), and the non-commercials have kept buying more and more bonds, thinking it would be a good investment. If these non-commercials unwind their long positions, we will start to see the real bond bubble collapse.

Chart 1: Commercial Open Interest in Treasury Notes

Even though non-commercials are buying like crazy, the yields haven’t gone down. On Chart 2 we see that yields have risen even when long positions in non-commercials went up. This is not a normal event.

Chart 2: 10 year U.S. bond yields

To find out more, go here.

Large Portion of QE3 Goes to Interest Payments on U.S. Debt

On 13 September 2012, Ben Bernanke announced a third round of quantitative easing also known as QE3. What the federal reserve will do is buy $40 billion in MBS and $45 billion in 10-30 year bonds per month. So a year from now, the federal reserve will have bought $480 billion in MBS and $540 billion in 10-30 year bonds.

So basically, the federal reserve will try to spur growth by helping the mortgage market and the bond market. But there is a catch in the deal. What investors need to pay attention to is the yearly interest payment on the U.S. government debt.

As you can see, the interest payments on total U.S. debt (blue dots) follow the total U.S. public debt outstanding (red dots). The higher the U.S. debt, the higher the interest payments on this debt.

What will this mean for investors? Read it here.

Eurobonds in Favor Against U.S. Bonds

In a previous article in March 2012 I pointed out that it was the perfect time to get out of U.S. bonds and go into eurobonds. Just recently we have a huge confirmation that the market is favoring European bonds (EU) over U.S. bonds (TLT) (Chart 1). We see that the WisdomTree Dreyfus Euro ETF (EU) has shot upwards on 21 August 2012 on news that the ECB would buy Italian and Spanish bonds. That day, the euro jumped to a seven-week peak against the U.S. dollar.

Chart 1: TLT Vs. EU

U.S. bonds yields have not kept pace (yields have not risen) with the rise of european bonds according to the correlation in Chart 1. So investors should quickly take action. Read more here.

Belgium Gets Negative Borrowing Cost

And finally, Belgium also started to earn money by borrowing from others.

Investors actually pay us to put their money in our government bonds. The 3 month Belgium bond yield has gone negative on 19 July 2012. I thank you very much for this free money!

Chart 1: Belgium 3 Month Bond Yield