All Together Now

 Our mid- May commentary, “Debt Bomb,” showed a chart of the important 10-year lending rate, the rate to which most peoples mortgages are tied, observing that the rise in short-dated Sovereign bond yields were travelling through the yield curve at a frightening pace.

Although the US 30-year yield is more important for the cost of dollar mortgages, we’ll stick with the 10-year for this posting for both continuity and due to the fact that its 30-year bull market, rising price on falling yields, ended in mid-2012, whereas the 30-year continued until January of this year since when its yield has stormed higher by 38%!

Returning to the US 10-year the first chart shows the 32-year bull market which commenced in 1980, and the mid-2012 turn since when the yield has jumped by 60%.

20 May 2015 Blog 1

Also overlaid is a Fibonacci retracement table where a reasonable 38.2% to 61.8% target equates to a potential yield of between 5% to 10% pa. In the “Land of the Free,” just think what a doubling to quadrupling in the servicing costs of mortgages will do the housing market specifically and to the wider economy in general.

Please remember to give a big thank you to the Federal Reserve for providing the “perception” that 1. They control interest rates and 2. The encouragement for USA PLC to leverage up to the hilt.

Moving swiftly on we note an interesting correlation, defined as “a statistical measure that indicates the extent to which two or more variables fluctuate together,” between the 10-year bond yield, the $gold price and the $US inverted to better show the relationship.

 20 May 2015 Blog 2

Logic would suggest that as interest rates climb higher, the $US would rise in value, but the chart above would argue against this. $Gold, an alternative form of money, and the dollar tend to be inversely correlated, also shown above.

Correlations work until they stop working, but at the moment they offer some clarity and are working together.

 

 

 

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