- Silver has fallen back to around $27.00 from AsiaPac highs of close to the $28.00 level.
- The precious metal has been weighed by a pick-up in US bond yields and strength in the US dollar.
Spot silver (XAG/USD), having nearly rallied as high as the $28.00 level during Tuesday’s Asia Pacific session, has been hammered in recent trade amid a pick up in the US dollar and surge in US bond yields. The move has coincided with a return of US flow following an extended weekend there, as well as after the release of a stronger than expected US manufacturing survey report. XAG/USD is not trading just above the $27.00 level, just above session lows in the $26.80s. Silver bears will be eyeing a test of last week’s lows of closer to $26.70.
The return of US flow
Big moves are being seen in US bond markets on Tuesday as North American market participants return to the fray (note, US markets were shut yesterday for Presidents’ Day). US bond yields have surged higher and the US treasury curve has steepened sharply; the US 10-year yield is up 6.2bps on the day to above 1.26% and the US 30-year yield it up 6.6bps to 2.07%. The 2s10s spread, a proxy for US treasury curve steepness, is up about 6bps to around 115bps, its steepest since the back end of 2015.
Big upside moves in nominal US bond yields are also being seen in real US bond yields and this is the key factor behind the decline in precious metals on Tuesday; the 10-year TIPS yield is up 2bps to back above -1.0%, though has admittedly fallen back from session highs where it briefly rallied above -0.96% (its highest level since early January). Meanwhile, the 30-year TIPS yield is up about 3bps to above -0.13%, its highest level since early November. Note that precious metals markets are highly sensitive to movements in US real yields; when real yields rise, investing in US bond markets becomes a comparatively more attractive place to store money as opposed to investing in precious metals, which don’t yield anything.
Inflation expectations have also risen by virtue of the fact that nominal yields have risen by more than real yields; 10-year break-evens are up about 3bps from last Friday’s levels to close to 2.24%, its highest since August 2014. Rising inflation expectations, typically a positive for precious metals, have not been enough to boost precious metals, which are seen as a hedge against inflation.
Markets betting on rapid US recovery
Bond market moves on Tuesday indicate that American market participants have returned from their long weekend keen to bet on a strong US economic recovery and higher inflation ahead and why not? Over the weekend, the US’ 7-day moving average of new Covid-19 infections dropped below 100K per day for the first time since November and the country’s vaccination drive, which is rapid compared to most of its developed market peers (except the UK), continues to accelerate. With the worst of the pandemic over for at least the winter, Covid-19 restrictions are likely to ease further and economic data to improve.
Meanwhile, expectations for more fiscal stimulus from Congress continue to grow. With former US President Donald Trump acquitted from wrongdoing by the Senate over the weekend, Congress is now free to focus its time and attention on getting the next stimulus bill passed. All the while, FOMC officials continue to impress that the Fed is going to remain ultra-dovish and look through any “transient” (as they call it) increase in inflation in the coming months.
In terms of what this means for silver; price action on Tuesday seems to suggest that expectations for an improvement in economic conditions later in the year might be accompanied by moves by the Fed to take its foot off the monetary stimulus gas pedal. In other words, markets seem to be betting that the Fed is going to taper its QE programme sooner or later, hence the upside seen in real yields.
If this ends up being the case, real yields could go much higher and this would be terrible for precious metals. If the Fed confounds expectations and remains uber-dovish (as there is a very high probability they will), then markets could be surprised, real yields could fall back and this could be a medium-term positive for the likes of silver. But it seems that sooner or later, the Fed is going to have to wind down its QE programme and this is unlikely to be a positive for silver and gold under any circumstance.
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