Julius Baer: US government bonds & Gold

Redacción - Lunes, 29 de Agosto

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FIXED INCOME

US government bonds: Fed Chair Yellen offers something for everybody

At long last, Fed Chair Janet Yellen delivered the long-awaited speech on “The Federal Reserve’s Monetary Policy Toolkit: Past, Present and Future”. The first couple of sentences sent shockwaves through the bond market as Chair Yellen joined Vice Chairman Stanley Fischer in praising the strength of the labour market and calling the time ripe for the next rate hike. The yield of the 10-year Treasury note got close to 1.6%. But as she progressed, the market moved in the other direction. Fed Chair Yellen acknowledged the problems associated with a low level of the natural rate of interest and outlined why she believes the Fed has to act with utmost caution when it comes to normalise its monetary stance. These words allowed the 10-year yield to drop to 1.53%. So, within a couple of minutes, Fed Chair Yellen managed to present the two opposing views about the rate outlook and managed to move the market from the top to the bottom of August’s trading range. With the Jackson Hole (non-)event behind us, the focus will shift to fiscal policy. The G20 meeting at the end of the week coincides with the finish for the budget for the US Fiscal Year that starts on 1 October. Any hint for a large fiscal boost is negative for the long end of the bond market. Additionally, investors need to follow the development on the money market carefully. If the reform of US money market funds translated to higher deposit rates on a sustained basis, money would be shifted again from bond funds to the short end.

As volatility remains elevated at the long end, we continue to prefer credit risk over rate risk. We expect flows into the riskier segment to slow only if the money market rate accelerates beyond 1%, which we are not forecasting in the near future.

Markus Allenspach, Head of Fixed Income Research, Julius Baer

COMMODITIES

Gold: Return of the rate-hike fears

It was not the much awaited speech from US Federal Reserve chairwoman Yellen at Friday’s Jackson Hole symposium which put gold under pressure, but rather the clarification by vice-chairman Fisher. Fisher said that the next interest-rate hike might happen as soon as next month and another one by the end of the year. Gold prices sold off and dropped around 2% to this morning’s low of USD 1,310 per ounce. Shifting expectations about the timing of the next interest-rate hike should continue to cause volatility in the gold market going forward. No matter the exact timing of the hike, we believe safe-haven demand from investors should fade as growth risks are receding. Adding our expectation of a rising US dollar and the prevailing bullish sentiment in the gold market, we see more downside than upside going forward. The case for gold as insurance has weakened again in recent weeks. Against the backdrop of our twelve-month price target of USD 1,200 per ounce, its insurance benefits still come at a price. For the reasons mentioned above, we see even more downside for silver. Prices still appear detached from fundamentals and should fall back towards USD 17 per ounce in the short term.

Gold has sold off on Friday after rate-hike fears returned to the market. No matter the exact timing, a rising US dollar and receding growth risk imply more downside than upside for gold. Gold’s insurance benefits come at a price on today’s levels. We see even more downside for silver.

Carsten Menke, Commodity Research, Julius Baer

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