By Bilal Hafeez 27-08-2019

Yield Curves Don’t Lie. But Central Bankers Sometimes Do. (Macro Voices, 28 min listen)

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(You can listen to the podcast by clicking here)

In this podcast, Jeff Snider, Head of Global Research at Alhambra, discusses how interest rates are currently driving gold prices up – its behaviour is similar to what we see in global bond markets. He explains that while negative bond yields make little sense to an ordinary investor, for many institutions those assets are a balance sheet tool and can have utility in managing liquidity risk (i.e. they consider it as an insurance policy). The opportunity cost of holding such bonds is liquidity premium that banks are willing to bear. Further, sovereign debt is highly dependent on repurchase agreements (repos) and act as collateral reserves. Later in the podcast Snider criticises Janet Yellen for over-promising on stimulus delivering growth; the markets clearly think differently and is expecting lower or even negative term premiums. Finally, he looks at why gold is the ultimate hedge – not only due to its general stability, but for the lowered cost of using it as a hedging instrument.

Why does this matter? Euro dollar futures are up (meaning the market is expecting lower short-term rates) and this points to overall lower bond yields caused by reduced expectations for inflation and expected further rate cuts. But a long euro dollar futures position would take a beating if Powell goes back to rate hikes. 

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)