Watching Bonds While Buying Commodities

“We believe the action in the bond market is the key to understanding the move in commodity and stock prices,” adds Dan Denning. “What you see in the charts below is the widest spread between 10-year and 2-year notes since 2003.


“The yield curve is getting steeper. Investors are charging the U.S. more to loan to it long term while they seem to be happy to park cash in shorter-term maturities, even if the real yield is negligible.

“The current spread between 10-years and 2-years is 263 basis points (2.63%). It blew out to 274 basis points in 2003. That was about the same time that Alan Greenspan’s Fed slashed rates to 1% and kept them there to kick off the leveraged bull market in all asset classes across the globe. Global synchronized boom.

“The Fed doesn’t have that flexibility today, of course. U.S. short-term rates (the Fed funds rate) are already being held in a range between 0-0.25%. If the central bank wants to try to bring 10-year rates down, it’s going to have to buy more bonds directly. And if it does so by creating more money, we reckon it puts more bullish pressure under gold, oil and copper prices.”