Own Some Gold and Avoid Overvalued Assets
Own Some Gold and Avoid Overvalued Assets from Gold Seek
The cost to the US government of borrowing money for a decade came within sniffing distance of 3% yesterday.
The US ten-year Treasury yield is sitting at 2.96% as I write this morning, having got to 2.99% yesterday.
Does this really matter? After all, 3% is just another number.
On the one hand, you’d be right to think that. On the other, it’s not so much the number as the direction that’s significant.
What the end of the bond bull market implies
If the US ten-year Treasury yield does breach 3%, we’ll be at heady heights not seen since 2013.
The big issue here is that bonds have been in a bull market since the early 1980s. In other words, yields (interest rates) have been falling, and bond prices have been rising.
This bull market in bonds has been accompanied by an almost equally long-lived bull market in equities. Stocks have suffered more painful crashes along the way, but broadly speaking, we had almost 20 years of good times up to 2000, then a crash to 2003, a rebound to 2007, another crash to 2009, and then near-enough another decade of good times.
So the question now is: if bond yields are really turning up now (having reached unprecedentedly low levels), then what does that imply for everything else?
After all, as bond yields have gone down, pretty much everything else has gone up. That’s logical. When bond yields are at 10%, a property that rents at an annual yield of around 12% is not very appealing. When bond yields fall to 5%, suddenly that property looks a lot more attractive. As a result, more money flows into property (say) and prices there go up (driving yields down).
That’s the basic mechanism at work here. So that, in turn, implies that if bond yields go up, then yields on everything else have to go up too. And rising yields on most assets (bonds mostly pay a fixed income) imply that either prices have to fall or profits have to rise (or both).
For example, if I own a property with a rental yield of 5% and I can get 8% from a risk-free government bond, then one of two things is going to happen: either I push the rent up so that I’m earning a better yield, or the market value of my property is going to slide sharply.