By Michael Maharey
Earlier this week, the 30-year Treasury yield rose above 3% for the first time since April 2019 as the carnage in the bond market continues.
Rising yields put pressure on gold. The yellow metal flirted with $2,000 an ounce but has since fallen below the $1,950 resistance. Once again, investors are obsessed with rising interest rates, but miss the big picture – real rates remain deeply negative.
Real interest rates are equal to the nominal rate (the numbers quoted in the news) minus inflation. The CPI is hovering around 8.5% (using baked government figures). Thus, the real yield of the 30-year Treasury is around -5.5%.
In other words, the 30-year yield needs to climb another 5.5% just to break even with inflation.
This is not negative for gold.
The last time bond yields were this high was at the peak of the Federal Reserve’s tightening cycle after a decade of easy money following the Great Recession. The fed funds rate was at 2.5% and the Fed was still trying to reduce its balance sheet. Meanwhile, the CPI was 1.8%. This means that the actual 30-year Treasury yield was 1.2%.
And at the time, the CPI was trending down. The CPI was above 2% in 2018. Thus, inflation was falling with returns above 3%.
Fast forward to today. We have 30-year yields again at 3%, but with a year-over-year CPI gain of 8.5% and rising. And the Fed is just beginning its tightening cycle. The federal funds rate is at a meager 0.25%. It has not started to reduce its balance sheet. In fact, the toll continues to climb.
To have real rates of 1.2% on 30-year Treasury bills today, the yield would have to increase to 9.7%. No one thinks that kind of return is even possible.
In fact, the markets seem to think we’re close to the top. After the March CPI figures came out, pundits started talking about “peak inflation”. After all, 3% was the top in the past. That means it’s probably the top now. But Peter Schiff made an important point in a recent podcast.
If rates capped at 1.2% real in 2019, why would they cap at -5.5% now? Why wouldn’t investors similarly demand a real return on their money when making a 30-year loan? Why would they just accept 5.5% losses for the next 30 years?”
Of course, no one would do that. So anyone buying a 30-year Treasury today should expect inflation to fall below 2%. But Peter said there was no indication that would be the case.
In fact, all available information suggests that inflation will continue to worsen. And even if it improves, it won’t come close to the 1.8% it was in April 2019.”
Given this inflationary environment, it is highly unlikely that the Federal Reserve will be able to keep rates as low as they have been for the past decade. The carnage in the bond market is therefore likely to continue as yields continue to rise. The only thing that can stop it is a return to Fed rate cuts and a return to quantitative easing.
This will likely happen sooner rather than later, as this overleveraged economy cannot handle high interest rates. But a Fed monetary policy pivot will mean more fuel on the inflationary fire.
The central bank is really damned if it does and damned if it doesn’t.
To state the obvious, there is no “opportunity cost” to holding gold when real rates are deeply negative. You lose real money by holding bonds that don’t pay enough interest to keep up with inflation.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.