Bonds Tank As Commodities Soar

From the Desk of Ian Culley @IanCulley

Can we all give the rate cut debate a break?

Everyone is obsessing over the Fed’s rate cut plans. Meanwhile, interest rates are climbing to their highest level since early December.

Instead of following Fed gossip and what-ifs, focus on what is: Yields continue to creep higher as inflationary assets rip.

Check out our Global Benchmark Rate Composite, an equal-weight basket of Developed Market 10-year yields (Germany, UK, Canada, France, Italy, Spain, Switzerland, Japan, Australia, and the US):

Our global composite is holding well above the lower bounds of a yearlong range, catching toward the underside of a flat 200-day moving average. 

Yields on sovereign debt show no signs of an imminent collapse.

Could rates roll over in the coming quarters? Absolutely! 

But the data fails to support a falling interest rate thesis. In fact, the charts suggest quite the opposite…

The commodity-bond ratio resembles Developed Market rates with two exceptions: Commodities vs. bonds are trading above their long-term average and breaking above their 2022 highs. 

Since this classic intermarket ratio peaked first, heading into its mirrored consolidation, perhaps it’s leading to an eventual upside resolution in global yields. 

Regardless, US treasuries are testing their year-to-date lows as commodities rocket higher. We’ve gone from reveling in Cocoa’s meteoric rally to witnessing copper and crude oil fly.

Set aside your rate-cut bets and turn off the noise.

Interest rates remain elevated worldwide. And the assets that benefit the most from an inflationary environment are ripping.

Have you noticed the strength of commodity-related stocks – from oil and gas to gold miners?

More importantly, are you prepared?

– Ian

Countdown to FOMC

The bond market is pricing in the first 25-basis-point rate cut this June.

Here are the target rate probabilities based on fed funds futures:

Click the table to enlarge the view.

This data is from the CME FedWatch Tool as of April 4, 2024.

Thanks for reading.

And as always, be sure to download this week’s Bond Report!