If Treasuries Reach 3%, That Would be Big. Here’s Why

The comments below are an edited and abridged synopsis of an article by Brian Chappatta

The global bond market’s primary benchmark, the 10-year US Treasury yield, is knocking on the door of 3%, a level it hasn’t topped in more than four years. That’s more than just a nice round If Treasuries Reach 3%, That Would be Big. Here’s Why | BullionBuzznumber; higher yields make the burden of everything from mortgages to student loans and car payments even heavier. Some market gurus see it as a turning point with effects that could be felt for years—and not just in bonds. With the Federal Reserve signaling that interest rates are going up even more, investors in riskier assets, like stocks and high-yield debt, are left to wonder if this is how their post-recession party ends.

Chappatta addresses what’s so important about yield; how to determine the benchmark 10-year yield; why yields are rising; why 3% is a milestone; why it matters; whether fixed-income mutual funds will take a hit (yes); how this will affect stocks; and what will happen next.

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This Post Has 2 Comments

  1. Don Charbonnier

    I believed higher rates were tougher competetion for precious metals with zero yield. So why does 3% for the 10yr help silver and gold……please advise

    1. Monica Gaudet

      Hi Don,

      The key question is why 10 year yield and not 2 year or 5 year yield?

      The reason 10 year yield is critical is because it usually takes that much time to develop a gold mine. The time it takes for exploration, development, taking environmental clearance and operation spans from 5 year to 8 year approximately. So that is why 10-year yield is more reliable than short term interest rates like 2-year. So we expect some headwinds if 10-year US Treasury yield continues to climb however there is a silver lining for gold when it comes to rising yield.Rising yield indicates an expectation of strong economy. Strong economy gives rise to inflation and Gold is used as hedge against inflation so in long term , rising yields are positive for Gold.

      Bottom line : Investors should note that any correlation, positive or negative, between Treasury yields and gold prices needs to be taken into context with other macroeconomic factors like inflation. The real influential power between these two asset classes is the real rate of return. As long as the yield on the 10-year Treasury exceeds inflation, then an inverse correlation between yields and gold prices should follow. But if real rates turn negative, the standard correlation investors usually see can quickly fall apart, turning gains into losses for unaware traders.

      Hope this helps!

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