The yields on 10-year US treasuries are rising. They’ve hit their highest level in nearly 20 years.
What does that even mean? And more importantly what are the implications? A lot of people are getting their knickers in a twist.
And why has gold’s promising little rally hit a wall?
And what about UK gilts, they’ve rocketed slap bang in the middle of the Labour Party conference, when they’re all promising more spending.
Make it make sense.
If you live in a third world country such as the UK, I urge you to own gold or silver. The pound will be further devalued, as will the euro and dollar. The bullion dealer I use and recommend is The Pure Gold Company. They deliver to the UK, the US, Canada and Europe. More here.
US Treasury yields are not just a US problem. They put upward pressure on the entire developed-world bond market, and the UK is particularly exposed because its own fiscal position is already so precarious.
Today, the yield on a US 10-year Treasury is around 5.25%, the UK 10-year gilt hit 5.44% on Monday, its highest level since 2007. At Tuesday’s auction, the government paid an average yield of 5.38% to borrow for ten years, the highest yield at a UK 10-year gilt auction since 1999.
Even a small increase in the cost of borrowing puts governments in trouble. Where are they going to find the money to pay the interest?
They’ve either got to raise taxes, cut spending, let the deficit grow, pray for growth or all four – and in the case of the UK in time for the Healey budget on October 28.
As US rates rise sterling comes under pressure against the dollar – it will no longer be propped up by the relatively high rates we have been offering - hence sterling’s recent declines. So we get higher inflation, especially energy, because of increased import costs.
Investors around the world need a reason to hold a UK 10-year gilt. Previously the higher rates we were offering were a reason. If a US 10-year Treasury offers, say, 5.25%, why hold gilts and carry the sterling risk without a much higher rate to compensate? The US Treasury market effectively sets a large part of the global opportunity cost of capital.
Higher US rates thus put upward pressure on UK interest rates. So debt gets even more expensive. Our fiscal position deteriorates. Higher rates hurt remortgaging, housing affordability, commercial property, corporate borrowing, infrastructure financing, private equity and so on.
Another point to note: the UK 10-year gilt is now yielding 5.4%, despite the Bank Rate being only 3.75%. That gap is telling you that the bond market is pricing a considerably higher long-term cost of capital than the overnight policy rate alone would suggest.
The really worrying configuration for Britain would be US real yields rising, US inflation expectations rising, sterling falling and UK gilt yields rising faster than Treasuries.
