Rising Yields: What Does It Mean For The Current Bull Market?

Last week stock markets lost pace and investors witnessed their first large losses since October. The rising yield in the bond market spikes fears for potential earlier unwind of stimulus.

Policies set out by central banks should always go hand-in-hand with faith in accomplishing their objectives. In other words, in order for central banks to be able to reach their objectives no speculative attack should be believed to be successful. If belief in the central bank’s capacities fades, the market can push the central bank in even more trouble. The first signs of reduced faith in the Fed’s policy commitment were visible last week. Inflation fears pushed up yield perspectives as the vaccine roll-out carries on, reducing coronavirus related hospitalizations and deaths. These developments triggered better than expected prospects for the near future.

However, these positive signs went hand-in-hand with reduced faith in the Fed’s continuing commitment to current expansionary stimulus policies which have pushed down Treasury yield rates since March. Low bond market returns have pushed up stock market in a search for yield. However, since late October stock markets have rocketed to new all-time-highs resulting in an unprecedented long bull run. Last week the tables turned as inflation fears spiked which puts the Fed’s stimulus policies under pressure as it could mean that new stimulus measures could be limited due to these inflation expectations. The Golden Investor has long discussed this potential split-problem for the Federal Reserve.

Precious Metals Have Been Bleeding Since August

The combination of reduced belief in the easing Fed’s stimulus, together with rising yields and thus bond market returns were especially detrimental to gold prices, as the rising yields already have driven down gold prices since late August. Silver actually revived in recent months due to the positive outlook for the metal as industrial demand increased for electronic products. It should be noted that physical purchases of gold and silver have risen sharply since the start of the corona pandemic and continue to thrive. In India, one the largest gold markets for jewelry in the world, demand have been rising as gold prices declined. At these levels premiums in India have been increasing due to increased consumer demand as the current level was considered “cheap”. The outlook for gold remains under pressure as large swings in the stock market and bond market could trigger more losses for gold on the short term.

However, as the economy is long from recovered, the Fed’s easing behavior will likely not let yields rise too much as it could be detrimental to rates in other markets as well, meaning that it could deteriorate consumer spending. It will become increasingly hard to keep the right balance between keeping both rates as inflation expectations down.

Rare Earth Demand Is A Sign Of A Changing Market

Lynas Corporation (ASX:LYC) posted a better-than-expected profit for the half year on last week, especially since prices of rare earths rose. China, responsible for around eighty percent of total rare-earth global supply threat to stop exporting to the United States as it are necessary materials for high-tech defense systems. Moreover, the rare-earths are used in magnets necessary for many electric hardware applications like hard discs and electric cars, which have not been hard due to reduced demand as a result of the corona pandemic. Lynas is up more than 200 percent since last year prior to the crisis as their profit rocketed more than 900 percent.

The drought in the rare-earth market is a signal of a changing economy and a shift towards more sustainable electric products. How much of the rise in demand is due to Chinese pressure and temporal increased lockdown demand should be seen. But on the long run the situation is not likely to change much, especially for Lynas that has been given green light to built a rare-earth facility in Texas to guarantee sufficient supply in the United States.

Stock Market Outlook

For now, it is important to keep a well balanced portfolio. It is recommended to diversify even more in the current market, as dividend yield is now lower than the 10-year yield on Treasuries, therefore perhaps TIPS (Treasury Inflation-Protected Securities) could be considered in a more defensive portfolio. As markets seem to be shaking, confirmed by above-expected profits of Flow Traders (FLOW.AS) and Virtu Financial (VIRT), both stocks could protect against volatility in the near future. A larger shift from tech stock towards value stock should be expected now that summer comes and vaccinations seem to gain pace. However, uncertainty remains elevated, therefore it is hard to make predictions about the near future. Rising bond yields are very profitable for financial stocks, diversifying in that direction could be smart. However, it is unclear how central banks around the world will respond to the sudden rise in yields, therefore precious metals and commodities can still be an important part of the portfolio.

Disclaimer: The Golden Investor is not a fortune-teller, be sure to make the right decisions in accordance to your own financial situation, this is not investment advise or anything like that.

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