Real Yields Challenge New Highs

From the Desk of Ian Culley @IanCulley

Messy, messy, messy.

If there’s one market description I’ve grown tired of more than others – it’s "messy." It’s my pain trade. 

Interest rates, the US dollar, crude oil, gold – you name it! – all are trendless and range-bound.

One of our viewers during yesterday’s live What the FICC? episode offered up an alternative description: ambiguous. I like it!

But there’s one area of the fixed-income, commodity, and currency landscape poised to break free from this ambiguity…

US real yields!

Check out the US five-year real yield challenging a shelf of former highs:

Yes, we’re talking about yields. But I see a potential bullish continuation pattern. 

Remember, we like buying smiley faces and erring in the direction of the underlying trend. Both point higher in this case. 

While we can’t directly trade the US five-year real yield, it’ll reach levels not seen since late 2008 if and when it completes this base.

It’s difficult to say if nominal yields will follow. But it’s clear we’re in a rising rate environment.

Nominal yields remain elevated while breakeven inflation rates decline. Those are the conditions spurring the rise in real yields.

But fresh highs for yields don’t necessarily spell trouble for risk assets.

In fact, commodities and cyclical stock market sectors often enjoy constructive tailwinds in these environments.

One asset will face an uphill battle as real yields rise: gold.

It’s no coincidence the shiny yellow rock undercut its 2011 highs, a key level marking its prior commodity supercycle peak, on June 28.

As long as real rates continue to climb, the near-term forecast for gold and precious metals is messy for longer.

Stay tuned!

Countdown to FOMC

The market is pricing in a 25-basis-point hike next month following the recent decision to pause.

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 June 28, 2023.

Thanks for reading. As always, be sure to download this week’s Bond Report!

And let us know what you think.