The Weekly Beat: 28 February 2022

·  The U.S. Treasury market shook off Russia’s invasion of Ukraine in less than a week, with only a slight decline in long-term rates on a weekly basis (Chart 1).  The move downward in real interest rates was much more forceful and led to a slight steepening of the real yield curve (Chart 2).

·  Geopolitical uncertainty and questions about energy security have put question marks around global growth estimates made only a month ago.  The result has been a pause in the steady yield curve flattening that has been taking place for nearly a year (Chart 3). 

·  Two points are worth noting.  First, this provides an entry point for one last flattener trade.  But be watchful, the Fed will not allow a yield curve inversion to occur and has the means to do so.  Second, there is a lot of tightening “in the works” already via that yield curve flattening (Chart 4).  That tightening will be hitting the economy at the same time energy price shocks are hitting.

·  Note the hesitancy of the 30-year nominal Treasury yield to break through highs set in 2021 while the 5-year has nothing holding it back (Chart 5).  The Fed’s hand will soon be forced to implement yield curve control via its repo and reverse repo facility.  Perhaps the best question for investors is how high the Fed will want to prop up the long end of the yield curve.  I will be watching for how long the 30-year real rate can stay positive (Chart 6).

·  Rising real interest rates are terrible for gold with the next worst thing being positive real rates.  That is the case for all real assets and the real asset component of equity prices.  Note that the correlation between gold and real interest rates, normally nearly one, has almost completely broken down (Chart 7).  Indeed, geopolitical tensions led to a spike in gold at a time when real rates were climbing (Chart 8).

·  Real rates are likely to keep rising in the near-term and geopolitical tensions did not boil over at the beginning of the war, so the path of risk is down in Ukraine.  Subscribers will be received a detailed note on the situation in Ukraine and the geopolitical implications this week.  The implication for gold is bearish in the near-term has $2,000/ounce looks like a hill too high to climb at the moment.  More on what investors can do to profit from the current gold environment in the subscriber’s section.

·  Stocks to Watch: BMY, CAJ, CPB, GILD, GIS, HMC, K, MMM, OMC, PFE, RIO, TAK