Bond Yields Sink, Gold ETFs Soar on Rising Recession Fears


Aug. 7 2019, Updated 1:16 p.m. ET

  • Today, bond yields are sinking and stock markets are tanking as markets become fearful of an upcoming recession.
  • Gold, silver, and precious metals ETFs are some of the rare winners in this scenario.
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Bond yields sink on recession fears

In an outright bloodbath on Wall Street today, the stock markets are tanking, and bond yields are sinking. The only thing that’s rising is safe-haven assets. According to CNBC, the US Treasury’s ten-year bond yield’s (IEF) slump to below 1.6% today means that investors are fleeing to safety as rising trade tensions increasingly threaten global growth prospects. Moreover, central banks across the world are signaling much more aggressive rate cuts than previously expected. The central banks of India, New Zealand, and Thailand have signaled a clear shift to aggressive monetary easing.

Bond spreads narrowing

Along with the plunge in yields on ten-year Treasury bonds, 30-year Treasury bond yields are down to 2.13%. This level marks their lowest point since 2016. The German yield curve is the flattest it’s been since the financial crisis. The German ten-year bund yield has hit an all-time low of -0.6%, and the 30-year bund yield has also hit a record low of -0.137%.

Bond yields aren’t the only thing that’s sinking. The spread between higher duration-bonds and lower-duration bonds is hitting fresh lows. The ten-year bond’s premium to the two-year security has hit 7.4 basis points, its lowest level since 2007. These movements in bond yields and spreads signal that investors are increasingly worried about a potential recession.

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Repercussions of the trade war

Most of the world’s recent shift to the safety of bonds is attributable to recent trade escalations between the US and China. After Trump announced via Twitter on August 1 that the US would impose a 10% duty on an additional $300 billion worth of Chinese imports, trade tensions quickly escalated. China vowed to retaliate, and it’s since ordered its state-run enterprises to stop buying US agricultural products. On August 5, the People’s Bank of China let the Chinese yuan fall below the psychological level of 7 yuan to the US dollar for the first time since 2008.

With trade tensions escalating, no deal is expected before the US election

The move didn’t go over well with the US at all, and it officially declared China a currency manipulator. Since both countries are taking much firmer stances than expected, the trade war is now expected to be protracted. In fact, many prominent investors and investment banks, including Goldman Sachs and Credit Suisse, don’t see a trade deal happening until after the 2020 US presidential election. For more information, read Goldman Sachs Sees No Trade Deal before the 2020 Election. Citigroup has cut its earnings forecast for the S&P 500 due to ongoing trade tensions and potential currency devaluation.

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Gold receiving safe-haven bids

Only government bonds and precious metals, including gold and silver, seem to be receiving safe-haven bids in this scenario. Gold is gaining doubly from trade war tensions. Uncertainty due to the conflict is sending investors to the safety of gold. The trade war is also weakening both global growth prospects and the US economy, lending support to the argument that the Fed should be more aggressive with rate cuts. Lower rates make gold competitive compared to other alternative assets, as it doesn’t yield anything in terms of regular income.

Gold ETFs outperform on trade jitters

From July 31 to August 6, the SPDR Gold Shares ETF (GLD) gained 4.3%, while the VanEck Vectors Gold Miners ETF (GDX), which tracks the movements of major gold miners and is a leveraged play on gold prices, gained 8.2%. The performances of safe-haven assets far outpaced the performances of equities. The Dow Jones Industrial Average Index (DIA) fell 3.1% in the period.

Among the more leveraged ETFs, the Direxion Daily Gold Miners Index Bull 3X Shares ETF (NUGT) and the Direxion Daily Junior Gold Miners Index Bull 3X Shares ETF (JNUG) have been on an absolute tear. They rose 25.4% and 27.7%, respectively, from July 31 to August 6. Today, as of 12:00 PM ET, the Dow was down 1.2%, and GLD was up 2.4%.

Gold and gold ETFs are also bucking the general downtrend in commodities, which are sagging on China’s weak economic growth.


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