Friday's Market Minute: Breakdown Of Yields, Gold, And The Nasdaq

Gold has finally broken above the psychological barrier of $1,800. The precious metal has slowly been extending its gains in what looks like a convincing breakout. Falling U.S. Treasury yields have been one of the reasons underpinning the latest moves, since nominal rates do not express the true negative yield on long bonds adjusted for term inflation. The yield on nominal 10-year Treasuries dropped below 1.60% at the time of the upside move in gold. As gold has no yield, it competes with the benchmark of safe returns. Gold prices are rising as the rebound in Treasuries remains muted despite some better-than-expected jobless claims and productivity data. It appears the stimulus trade is not going away for gold after FOMC decisions showed policy tightening is still far away.

With stable yields, the Nasdaq and small-caps appear to mark the decoupling between interest rates and high-beta growth tech names. As rates have fallen over the past week or so, tech names have not responded in the manner with which they had over the last 18 months. Stable low rates translate into high present value of earnings estimated to be generated further out in the future. In other words, low rates are typically inversely related with high prices for growth-oriented equities. The bond market suggests that tech should be doing better, and yields are not rising despite the narrative of permanently higher inflation to come. For the most part, big tech reported record numbers last week but the response follow through was lackluster. This is typical for range-bound markets and eventually, all consolidations are resolved with trending markets either up or down.

Nasdaq underperformance relative to lower rates could be due to rising concerns about inflation not expressed in the bond market, but rather in commodities. If inflation is non-transitory, then why would foreign and domestic institutions buy long-duration bonds in what is expected to be a rising rate environment? It appears the preference for liquidity and safety is a small price to pay against the backdrop equity indices setting new highs. The appetite for risk has increased broadly on stimulus and reopening, and equity prices relative to forecasts of earnings are near the top of their historical ranges. Commodities like lumber and gold express inflation, but treasuries currently express risk aversion and preservation of capital and liquidity.

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