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  • Spot silver has prices have dropped under the $27.50 mark in recent trade amid rising US bond yields.
  • Bond yields are being pushed higher by good vaccine news, as well as Fed Chair Powell’s “greenlight”.

Spot silver prices (XAG/USD) have slipped to fresh session under the $27.50 mark in recent trade, weighed predominantly by a pick-up in US bond yields. Prior to the recent drop, spot silver had been trading close to Asia Pacific highs in the $27.90s. To the downside, should bond yields continue to rise and pressure the precious metals complex, technicians will be eyeing support for spot silver around the $27.30 mark, an area that has provided a decent floor to the price action thus far this week.

Driving the day

As noted, the main driver of recent downside in spot silver markets has been an acceleration in US government bond market, which has seen US yields break beyond key levels; the US-10 year yield has risen above the 1.40% mark, up over 6bps on the day, while the 30-year yield is moving into the upper 2.20s% and eyeing a test of 2.30%, up nearly 8bps on the day. Real yields have also been moving higher; the US 10-year TIPS yield is up just over 1bps and is back above -0.8%. Note that when the return on bond market investments rises, the incentive to allocate capital into non-yielding precious metals (and even stock markets, which do yield) is reduced.

Driving accelerated upside in US bond yields is perhaps the latest news from the FDA, who published briefing documents saying that their safety analysis of Johnson& Johnson’s Covid-19 vaccine supported a favourable safety profile and there were no specific concerns that would preclude EUA issuance. Johnson & Johnson’s vaccine is seen as a potential game-changer as only one shot is required, so it could drastically accelerate the global vaccination drive.

This feeds into the “vaccine optimism” this is being touted as one key factor behind the recent rise in US government bond yields, as good vaccine news drives expectations for a faster economic reopening and thus stronger economic growth ahead. Expectations for strong economic growth ahead are being further pumped by growing anticipation for further fiscal spending in the US; the House is expected to vote in favour of US President Joe Biden’s $1.9T stimulus bill at the end of the week and Congress is already talking about the follow-up infrastructure investment bill, that could be nearly twice as large.

Note also that bond yields were effectively given a green light to continue rising from the Chairman of the US Federal Reserve on Tuesday; Jerome Powell did not express any concern about the recent rise in yields, instead attributing the rise to the above-mentioned positive fundamentals. By contrast, ECB President Christine Lagarde on Monday opted to “jawbone” European government borrowing costs lower by saying that the bank is monitoring longer duration bond yields (triggering a drop in 10-30year European government bond yields). Powell’s lack of concerns has been taken as a “green light” for US yields to rise even further.

In terms of what this means for precious metals, rising real yields is set to be a problem. But for now, with the Fed also continuing to signal that ultra-accommodative monetary policy is here to stay until a lot more progress has been seen towards the bank’s dual mandate, USD upside ought to be somewhat limited, as should precious metal downside. Meanwhile, silver may outperform the likes of gold, given growing demand for its use as an industrial metal as the global economy recovers.

 

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