Macro Insights: Have bond yields peaked?

LOWER BOND YIELDS: US 10-year bond prices have fallen sharply, and yields doubled this year to 3%. This has driven equity valuations below average, and led the correction. Our updated copper/gold ratio shows bond yields may have overshot (see chart). This supports our ‘less bad’ view, of peaked inflation and interest rate fears. However it risks being replaced by a stepped up recession ‘scare’. This may shift the focus from valuations to earnings, reinforcing traditional defensives from utilities (XLU) to consumer staples (XLP), but also maybe select ‘big tech’ Growth. The economic outlook is stressed but secure, sensitive to easing China lockdown fears.

COPPER/GOLD RATIO: This is a long-standing market barometer for both risk appetite and bond yields. The predictive power is driven by their respective uses. Gold as the longest standing haven asset and copper the opposite. Copper has among the broadest industrial uses, from construction to electronics. This led to its nickname ‘Dr Copper’, given for its economics PhD.

IMPORTANCE: The copper/gold ratio direction and its movement relative to bond yields tells us a lot. Where divergences open, like 2018 and 2020, bond yields have ultimately followed the ratio’s lead. The current level shows a potential yield overshoot, with growth fears mounting, with haven gold prices holding up better than weakening ‘Dr Copper’ prices. This may tempt a look again at bonds, with the most sensitive long duration (like TLT) down over 20% this year.

All data, figures & charts are valid as of 16/05/2022