Reduced inflation and stimulus expectations are combining with a notable uptick in coronavirus cases in the U.S. and especially in Europe where there is fear a second wave of the virus could again cause businesses to close and dent the global economic recovery.
The intrigue: That would normally provide a boost for bond prices and precious metals, but gold and silver are instead following inflation expectations lower. And government bond yields have fallen nearly as low as they can without the Fed resorting to negative interest rates, says Subadra Rajappa, head of U.S. rates strategy at Société Générale.
- "Treasuries don’t have anywhere to go from here," Rajappa says, noting that she expects to see yields on the benchmark 10-year note stay between 0.5% and 1% given the massive U.S. budget deficit and weak demand at recent Treasury auctions.
What to watch: Gold and silver prices have fallen meaningfully in the last two weeks, with gold down 5.5% and silver down 18% since Sept. 1. But Axel Merk, president and portfolio manager at Merk Hard Currency Fund, says he expects this will be a bump in the road on the way higher.
- "In the long run we’ll be cranking a boatload of money and spending a boatload of money but in the short-term inflation expectations have come down a bit, which is very consistent with what happens in a risk-off environment."