This chart of the ten year US yield, is very important as the 10 year yield essentially is the base for other rates in mortgages, credit and loans etc.
You can see that we were at 16% back in the 80's, and we are not about to retest the lows again which was set in 2012,2016 and seems like it will occur this year. Setting up a triple bottom, or a range after a very extended downtrend with multiple swings.
Remember, bonds and yield are inverse so when yield drops, bond prices move up. This is still likely to happen. Why? Because in a risk off environment, you run into bonds. Meaning bonds go up, and yields go down.
Now think that you are institutional fund or even a pension fund that needs to chase yield. Pension funds were historically into fixed income but have now had to switch to equities to chase yield. Institutions, or other larger funds, that follow asset allocation or rebalancing generally sell stocks when overpriced and move into bonds and vice versa.
Well we are in an environment where BOTH stocks and bonds are at highs. Some would say overpriced.
What does this mean? It means bonds are not held for yield, but are held for trades. Finding a greater fool who would buy the bond and loss money holding it until the duration of the bond. This is apparent in Europe and Japan where yields are negative. However, bonds still are traded because many think yields will be cut deeper into the negative!
In the US and other western nations, many think cuts will go to 0, and perhaps even into the negative. This means bond prices will go up. Again, a trade and not really held for yield.
One day it will make no sense to hold bonds for yield...just for trades...which is likely what we are already seeing. Don't believe my analysis? Listen to someone more wealthier and more smarter than me, Ray Dalio. He is warning of a paradigm shift where interest rates must go higher...unless bond markets are killed.
So central banks cannot control longer term interest rates, they can actively control short term interest rates. was a way for central banks to buy longer term bonds to suppress long term interest rates. Essentially taking away the capitalist free market price mechanism for interest rates. We are in managed debt markets. Europe and Japan can be in negative rates because they killed their bond markets. Because of negative rates it really is the ECB or the BoJ that is at the auctions.
This is why many are saying that central banks have run out of tools. They can only do forever and can never allow interest rates to ever normalize because it would wreak (rekt) people. This is the confidence crisis that is upcoming. Soon markets will realize that central banks are stuck. That , which was a desperate policy to prevent another 1920's-30's like global depression, is now the norm and will continue forever because it did not actually work for the recovery.
Central banks need to keep this system propped, meaning rates will be dropping. When I checked the yield curve today, the inversion is coming back. I am expecting a rate cut to happen well before the market expectations of a cut in Fall of 2020.
So where do you go in this type of macro environment? Where do you go in a risk off environment? Gold is looking pretty attractive...