It seems as if there is a tale of two markets right now. Commodities, Equities and US Treasuries are not behaving the way in which one would think that they should “normally” trade. In short given the strength of equities, commodities, and precious metals the price of US Treasuries should be falling, albeit not rising. Yet it seems as if rising gold, silver, platinum, copper, commodities in general, and equities are good for US Treasury prices…….if this recent relationship holds then if Gold trades at $1300, and Silver at $25 six month from now then TLT will trade well above the 100 level and IEF will trade at a multi-week high! Needless to say that does not make sense not even to a 15 year old! Rising prices of silver, platinum, and gold are by definition inflationary in nature…..so how US Treasury prices can rise on the back of stronger precious metals prices is totally beyond us.
Perhaps the foregoing discussion begs the question – is the activity in the US Treasury market the real deal in that it is correctly anticipating a “deflationary” and or low growth environment…….and if it is then obviously commodity prices are about to implode as they did last year? Or is it the other way around – that is, precious metals and commodities in general are suggesting that US Treasury prices are about to fall off a cliff?
We think that the real deal lies with the behaviour in commodities (metals and precious metals in particular), equities, and the TIP:US 10yr spread – that is, US Treasury markets are on the verge of falling into the abyss rather than commodities. Of course now we wait for destiny to “play out”.
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