Three Percent Yield Drives Gold Higher and Equities Lower

The yield on the 10-year Treasury notes climbed to 3% today, the first occurrence of a 3% rate since back in 2014.

On an individual economic level, borrowing costs will increase for loans on mortgages, automobiles, and consumer credit. On a corporate level, it will increase the cost of doing business. Collectively, these increased costs will dampen the pace at which the economy is growing.

The repercussions of higher interest rates for this benchmark Treasury note were felt throughout multiple markets across a broad swath of financial asset classes.

Market sentiment quickly reacted to higher interest rates, putting substantial downside pressure on U.S. equities while bidding up gold and silver pricing.

The Dow Jones Industrial Average traded over 600 points lower before recovering slightly and logging a 424-point decline on the day. Closing at 24,024, the Dow lost 1.74%.

According to MarketWatch, “Markets have been captivated by rising U.S. bond yields recently, as the 10-year benchmark yield TMUBMUSD10Y, +0.60% tested the psychologically important 3% threshold Tuesday. The rise in U.S. interest rates has come as traders increasingly start to price in four interest-rate hikes in 2018 from the Federal Reserve, rather than the three signaled by policymakers.”

While higher yields on Treasury notes will have a negative impact on equities not directly tied to the banking sector, its impact on gold pricing could be both bullish or bearish.

Higher yields will typically produce an increased appetite for the fixed income asset class rather than safe-haven assets, such as 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’s dramatically lower equities pricing, provided bullish tailwinds which helped gold prices break their three-day losing streak. Gold pricing was also aided today by a weaker U.S. dollar.

Gold futures gained $9.20 in trading today, with the June 2018 contract currently fixed at $1,333.20.

Three of the four precious metals gained in value today, with the exception of palladium which closed at $967 per ounce after losing $11.70 in trading today, a 1.2% decline.

Wishing you as always, good trading,