Julius Baer Review: Bond Yields, Economic Momentum and Precious Metals
Julius Baer economists analyze Europe's economic strength, bond yields, Fed rate hike expectations, and recent turbulence in gold and silver markets.
Economists at Julius Baer Wealth Management have published an economic review focusing on Europe's economic strengthening, the market situation of gold and silver, bond yields, and the possibility of a Federal Reserve rate hike.
Dario Messi, Head of Fixed Income Analysis, and Afonso Borges, Fixed Income Researcher at Julius Baer, noted that the recent rise in government bond yields has inevitably rekindled concerns among bond investors. After all, rising yields translate directly into falling bond prices, making the latest repricing another uncomfortable period for bond portfolios. However, when examining how far yields can rise and how dangerous such moves might become, the key question is not whether yields are rising, but why they are rising.
From this perspective, the recent movement is relatively reassuring. It appears that the rise in yields is primarily a story of rising real yields, rather than an expression of inflation expectations becoming unanchored. In other words, markets are not doubting the Federal Reserve's ability to curb inflation, but are gaining confidence from an economic outlook that remains very resilient and continues to prove stronger than expected.
The Impact of Economic Momentum on Central Banks
David Kohl, Chief Economist, and David A. Meier, Economist at Julius Baer, pointed out that September business survey data indicated a strengthening of growth momentum in the eurozone, confirming that economic activity picked up in the final quarter of the year. S&P Global's Eurozone Composite PMI rose to 53.1 points, significantly above the 50-point threshold separating economic expansion from contraction. Strengthening activity in the services sector in Germany and France helped narrow the gap against positive sentiment in the manufacturing sector.
In the US, economic activity continues to surge, with survey data pointing to a broad-based acceleration across various sectors. Meanwhile, businesses are reporting escalating input price pressures, driven by a renewed rise in energy prices. Output prices also rose at a faster pace in Europe, but not in the US.
Gold, Silver, and Monetary Policy
Carsten Menke, Head of Next Generation Research at Julius Baer, described the start of the week as turbulent in the gold and silver markets. US bond yields continued to rise, pushing gold and silver prices down by up to 3.4% and 5.2%, respectively. It is important to note that the rise in yields stems from the real yield component rather than the inflation component. Rather than reflecting concerns about US debt and its associated interest burden, rising real yields are generally seen as evidence of a very robust economic growth environment.
Looking beyond the current fight against inflation, growing concerns regarding US debt and the interest burden are expected to support both gold and silver. Gold also benefits from purchases by central banks, representing a significant structural source of demand that does not exist in the case of silver. Julius Baer maintains its existing assessments: a positive stance on gold and a neutral stance on silver.
