Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

Don’t Miss the “Real” Story on Rising Bond Yields

  by    0   1

Earlier this week, the yield on the 30-year Treasury rose above 3% for the first time since April 2019 as the carnage in the bond market continues.

Rising yields have 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 fixated on rising interest rates, but missing the bigger picture — real rates remain deeply negative.

Real interest rates equal the nominal rate (the numbers quoted on the news) minus inflation. The CPI is running at around 8.5% (using the cooked government numbers). So, the real yield on the 30 -year Treasury is in the neighborhood of  -5.5%.

In other words, the 30-year yield needs to climb another 5.5% just to get to the breakeven point with inflation.

This is not a 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 in the wake of the Great Recession. The Fed funds rate was at 2.5% and the Fed was still trying to shrink its balance sheet. Meanwhile, the CPI was 1.8%. That means the real yield on the 30-year Treasury was 1.2%.

And at the time, the CPI was trending down. CPI was above 2% in 2018. So, inflation was coming down with yields over 3%.

Fast forward to today. We have 30-year yields at 3% once again, but with a year-over-year CPI gain of 8.5% and rising. And the Fed is just beginning its tightening cycle. The Fed funds rate is at a paltry .25%. It hasn’t started to shrink its balance sheet. In fact, the balance sheet continues to creep higher.

In order to have 1.2% real rates on the 30-year Treasury today, the yield would need to rise to 9.7%. Nobody thinks that kind of yield is even possible.

In fact, the markets seem to think we’re near the peak. After the March CPI numbers came out, the 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 topped out at 1.2% real in 2019, why would they top out at -5.5 now? Why wouldn’t investors similarly demand a real return on their money when they’re making a 30-year loan? Why would they be content to accept 5.5% losses for the next 30 years?”

Obviously, nobody would do that. So anybody buying a 30-year Treasury today must expect inflation to move down below 2%. But Peter said there is no indication that will be the case.

In fact, all of the information that’s out there would suggest that inflation is going to continue to get worse. And even if it does improve, it’s not going to go anywhere near the 1.8% it was in April of 2019.”

Given this inflationary environment, it’s highly unlikely that the Federal Reserve can hold rates as low as they were over the past decade. So the carnage in the bond market will likely continue with yields continuing to rise. The only thing that can stop it is a Fed pivot back to rate cuts and a return to quantitative easing.

That will likely happen sooner rather than later because this over-leveraged economy can’t handle high interest rates. But a Fed monetary policy pivot will mean more gasoline on the inflationary fire.

The central bank really is damned if it does and damned if it doesn’t.

To state the obvious, there is no “opportunity cost” in holding gold when real rates are deeply negative. You are losing real money holding bonds that aren’t yielding enough interest income to keep up with inflation.

Why Buy Gold Free Report

Get Peter Schiff’s key gold headlines in your inbox every week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?

Related Posts

Fed Balance Sheet Creeping Upward Again

The Federal Reserve has talked a lot about fighting inflation. But what has it actually done? In practice, not a lot. It has nudged interest rates up 75 basis points. And while the Fed has ended the massive quantitative easing program that it ran during the pandemic, it pushed balance sheet reduction back from May […]

READ MORE →

Peter Schiff: The Fed Girds for Battle

It’s the Fed’s “hold my beer” moment. After more than a year in which Federal Reserve leadership appeared clueless, pollyannish, and indecisive, the Fed is conducting a full-throated messaging campaign to show that it is as serious as cancer about the inflation surge that is scaring the bejesus out of consumers, investors, and economists.

READ MORE →

The Fed Has Destroyed Our Savings

When I was about seven or eight years old, I remember my mom taking me to the bank to open a savings account. She explained that if I put some of my allowance in savings, that money would grow over time. Well, that doesn’t work anymore.

READ MORE →

What Are Strong Retail Sales Really Telling Us?

American consumers are in a sour mood, but they haven’t stopped spending money. The problem is they’re spending money they don’t have. And they’re getting less for it.

READ MORE →

Peak Inflation? Not So Fast!

The March Consumer Price Index (CPI) was 8.5% annually, the highest since December 1981. But the mainstream narrative was that inflation had probably peaked because core inflation, stripping out more volatile food and energy, “only” rose by 0.3%.  Mainstream pundits reasoned that the oil shock in the wake of Russia’s invasion of Ukraine primarily drove […]

READ MORE →

About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
View all posts by

Comments are closed.

Call Now