The copper-to-gold ratio and U.S. Treasury yields have usually followed each other throughout recent history, but the widening spread between the two shows the recent rally in 10-year yields could be overdone, said Chris Kimble of the Kimble Charting Solutions.
Kimble used this chart of a 20-year correlation between the copper-to-gold ratio and the 10-year treasury yield
to explain why. He has followed this correlation to see if bond yields are changing trend, or if the trend has become overdone.
“As you can see, the two tend to follow each other in trend. The spread between the two is its widest in a couple of decades right now, with the 10-year bond surging higher,” the chart watcher wrote in a Wednesday note.
It seems likely that it is time for the spread to narrow, or it would suggest “some credit-quality issues in the U.S. government-bond paper,” which would be a whole other concern, Kimble said.
“This trend is on our radar as inflation is a major nemesis and the Federal Reserve is raising interest rates very quickly,” Kimble wrote. “This has spurred a fast rally in 10-year yields.”
Read: Recession ahead? This bond-market indicator is flashing a ‘code orange’ warning.
The yield on the 10-year Treasury slipped to 3.938% on Thursday as investors reassessed the Federal Reserve’s path after the Bank of Canada delivered a smaller-than-expected rate hike the day before. On Thursday, the European Central Bank announced a widely expected interest-rate increase of 75 basis points, to 1.5%. The hike was interpreted by investors to be a dovish move in the bank’s rate outlook.
For the month, the 10-year yield is up 0.136 percentage points, while year to date the yield is up 2.442 percentage points, according to Dow Jones Market Data.
Fed-funds futures traders now see a 87.3% probability of a 75-basis-point hike at the Fed’s policy meeting next week, according to the CME FedWatch tool. But the probability of a 75-basis-point rise in December fell to 37.7% on Thursday, while the probability of a 50-basis-point rise increased to 55%.
See: Market expectations start to shift in direction of slower pace of rate hikes by Fed
“The ‘copper-to-gold’ ratio indicates U.S. rates are too high as industrial growth relative to gold has not kept up,” said Jim Masturzo, chief investment officer at Research Affiliates. “This metric provides a nice indicator on the needed direction of rates, but timing is difficult to discern.”
Gold for December delivery
was down $3.60, or 0.2%, to settle at $1,665.60 an ounce on Comex on Thursday. December copper
fell 0.7% to $3.5195 an ounce.
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