Shit is gonna get bumpy fellas….( GOLD AND THE YIELD CURVE )
From Quoth the Raven (see paragraphs below): Long article just posted the intro….I know the long term affect of long end of the yield curve exploding upwards, but I don’t know the short term consequences. Hold tight as I think the ride is going to get bumpy no matter what you are invested in. We have not had a raising rate environment since the early 80’s. I think some or most on this board may remember what that was like. I don’t think we can go Volker-esque as it would bankrupt the gov’t even faster, but ST rates are definitely staying put as the US Govt can’t afford 2 trillion a year in interest ( 2 year at 5% time 40 trillion in debt). There will be limited issuance of 30 year UST bonds as Treasury simply can’t afford it. May you live in interesting times….
Well, that didn’t take long.
Less than 24 hours after I wrote that soaring bond yields in the United States and Japan were one of the major reasons I thought the AI bubble could finally begin breaking later this year and into 2027, global markets woke up Tuesday morning and decided to provide a helpful visual aid.
Japan got smoked, U.S. futures moved lower, bonds sold off across the developed world, oil pushed higher, and the 30 year U.S. Treasury yield punched above 5.3%, reaching its highest level since 2007.
The Nikkei fell roughly 2.5% Tuesday as investors dumped risk assets, while Japan’s benchmark 10 year government bond yield briefly touched 2.945%, its highest level since 1996. The selloff extended further out the Japanese curve as well, with the 30 year JGB yield reaching roughly 4.1%, it’s highest level in history.
EDITOR ADDED….SEE THE COMMENT SECTION FOR AN AMAZING CO-PILOT (AI) EXPLANATION OF YIELD CURVE AND REAL INTEREST RATES ON GOLD…AND WHERE WE ARE TODAY !!!
LIVE AN LEARN INSTANTANEOUSLY …WHAT A TIME TO BE ALIVE
I ASKED CO-PILOT TO EXPLAIN WHAT STEEPENING YIELD CURVE MEANS ….EXPECTING A CUT AND DRY ANSWER…BUT …NOPE !
WHEN 30 YEAR BOND YIELDS RISE BUT 2 YEAR YIELDS DONT THE YIELD CURVE IS SAID TO BE WIDENING WHAT ARE THE CONSEQUENCES USUALLY FOR STOCKS AND GOLD IN PARTICULAR
Copilot said:
Yes. If 30-year Treasury yields rise while 2-year yields stay roughly unchanged, the yield curve is steepening (widening) from the long end. The interpretation depends on why long yields are rising.
Scenario 1: Growth/Inflation Expectations Rising (“Bullish Steepening”)
Investors believe:
Future economic growth will be stronger
Inflation may be higher
The Fed does not need to cut rates soon
Typical impact:
.. Cyclical stocks (banks, industrials, energy) often perform well
.. Financials benefit because a steeper curve can improve lending margins
.. Growth stocks (especially tech) may face some pressure because higher long-term yields reduce the present value of future earnings
..Gold often struggles because rising real yields increase the opportunity cost of holding a non-yielding asset
Scenario 2: Fiscal/Debt Concerns (“Bearish Steepening”)
Investors demand higher yields because:
Government borrowing is increasing
Treasury supply is growing
Inflation risk or fiscal sustainability concerns rise
Typical impact:
.. Stocks can become volatile or decline
.. Long-duration growth stocks often underperform
.. Gold may perform well if investors view rising yields as reflecting inflation or currency-debasement concerns
.. Commodity-related assets may benefit
The Key Variable for Gold: Real Yields
Gold tends to respond more to real yields than nominal yields.
Think of it this way:
A..30Y yield rising because inflation expectations are rising faster than yields > Real yields fall Gold tends to rise
B..30Y yield rising because real interest rates are rising > Real yields rise > Gold tends to fall
Historical Tendencies
Yield Curve Steepening Cause.. Stocks.. Gold
..Stronger growth expectations ……Positive ……..Neutral to Negative
Higher inflation expectations …….Mixed… ……..Positive
Rising real yields …Negative for growth stocks.. Negative
Fiscal/debt concerns ……..Volatile ……..Often Positive
So the most important question is not “Are 30-year yields rising?” but rather “Are they rising because of growth, inflation expectations, or higher real yields?” That distinction often determines whether gold rallies or sells off and whether the stock market views the steepening as healthy or dangerous.
Explain how to identify if rising yields are due to growth or inflation
Copilot said:
A useful framework is to break the nominal Treasury yield into:
Nominal Yield = Real Yield + Inflation Expectations
When the 30-year yield rises, ask: which component is causing it?
The Best Indicator: TIPS Breakevens
Compare:
30Y Treasury yield
30Y TIPS (inflation-protected bond) yield
Breakeven inflation rate
Example 1
30Y Treasury: 4.5% ? 5.0%
30Y TIPS: 2.0% ? 2.0%
Breakeven: 2.5% ? 3.0%
Interpretation:
Inflation expectations are rising.
The market is worried about future inflation.
Usually bullish for gold.
Example 2
30Y Treasury: 4.5% ? 5.0%
30Y TIPS: 2.0% ? 2.5%
Breakeven: unchanged
Interpretation:
Real yields are rising.
Investors want higher compensation for lending long term.
Often negative for gold and long-duration stocks.
Watch the Dollar
Growth-driven rise in yields
Typically:
Yields ?
Stocks ?
Dollar ? or stable
This suggests confidence in the economy.
Inflation-driven rise in yields
Typically:
Yields ?
Commodities ?
Gold ?
Dollar may weaken
This suggests concern about purchasing power.
Watch Sector Leadership
A quick stock-market clue:
If these are leading:
Banks
Industrials
Transportation
Small caps
The market is usually pricing better growth.
If these are leading:
Gold miners
Commodity producers
Energy
The market is often pricing inflation.
Watch Gold’s Reaction
This is one of the easiest tells.
Yields ? and Gold ?
Usually means:
Real yields are rising.
Growth is improving.
Inflation fears are not the main driver.
Yields ? and Gold ?
Usually means:
Inflation expectations are rising faster than yields.
Investors are seeking inflation protection.
A Simple Market Checklist
When 30-year yields jump:
Is gold up or down?
Are TIPS breakevens rising?
Are banks outperforming or underperforming?
Is the dollar strong or weak?
Are commodities rallying?
Most likely interpretation
Observation Market Message
Yields ?, Banks ?, Gold ? Growth / higher real rates
Yields ?, Gold ?, Commodities ? Inflation expectations
Yields ?, Stocks ?, Gold ? Fiscal or debt concerns
Yields ?, Dollar ?, Gold ? Rising real yields
The signal I personally watch first is gold versus the 10Y or 30Y real yield (TIPS yield). Gold is often less sensitive to nominal yields and much more sensitive to changes in real yields. When real yields rise sharply, gold usually struggles; when inflation expectations rise faster than real yields, gold often performs well.
OK THIS IS A GREAT TUTORIAL NOW LETS CUT TO THE CHASE….WHAT IS YOUR ANALYSIS OF THE PRESENT SITUATION WHERE THE YIELD CURVE IS STEEPENING….BULLISH OR BEARISH FOR GOLD ? INFLATION OR GROWTH ?
Copilot said:
Based on what I’m seeing right now, I’d characterize the steepening as more inflation/fiscal-premium driven than growth driven, and therefore modestly bullish for gold.
Here’s why:
The 30-year yield has been pushing to multi-year highs, while the 2-year yield has remained much more anchored.
Recent commentary around the move points heavily to:
Large fiscal deficits
Expanding Treasury issuance/debt supply
Concerns that inflation may remain above target
Rising term premium demanded by investors
That’s different from a classic “growth boom” steepening where investors are aggressively raising growth forecasts and bidding up cyclicals.
My one-line verdict
This looks more like a bear steepener than a growth steepener.
And historically:
Growth steepening … often negative/neutral for gold.
Fiscal/inflation steepening … often supportive for gold.
The one thing preventing me from being aggressively bullish gold
Real yields.
Some analyses indicate a meaningful part of the rise in long yields is coming from higher real yields, not just inflation expectations.
If:
30Y yield rises because real yields rise,
and the dollar stays firm,
then gold can struggle despite all the inflation headlines.
So if I had to choose today
I’d rank the drivers:
Fiscal/term-premium concerns (largest)
Sticky inflation concerns
Stronger growth expectations (smallest)
Therefore:
Current yield-curve steepening = somewhat bullish for gold, but not explosively bullish because real yields are also elevated.
The really bullish gold setup would be:
Long yields high,
Breakeven inflation rising,
Real yields falling,
because that means investors are losing confidence in future purchasing power. We’re not fully there yet. What we’re seeing now is closer to”bond market distrust of long-term fiscal and inflation outlook” than”economic boom
“We have not had a raising rate environment since the early 80’s. ”
1994 was the big one.
Along with 2022 and 2023.
Bond market bears.
EW now sees us in SECULAR bond market bear (as in for decades).
Where the first leg up for yields is nearing a top then pause.
Eventually, housing prices fall again but higher rates will mean next to no refi cycles and funds deployed toward a house come at a larger opportunity cost in terms of foregone interest income.
The bills are coming due.