Interest Rates Taking Directional Cues from Commodities

The 10-year Treasury yield has plunged 0.6 per cent this year, tugged down in recent weeks by headlines about Fed easing expectations or the ongoing trade dispute with China. The benchmark Treasury hit 2.06 per cent yesterday, its lowest reading since September 2017 and placing the 10-year yield in the bottom decile of its historical range.

While recent yield behavior may appear to be capricious and event-driven, the path of the 10-year is actually moving in a more orderly fashion. The 10-year is in fact taking its cues from the relationship between two commodities, gold and copper: while copper is sensitive to global economic activity, gold is one of the most defensive commodities and has been a store of value dating back to Agamemnon.

This particular yin and yang of commodity pairs has done a good job ushering the direction of the 10-year Treasury yield in recent years, having led yields higher over the first half of 2015 and lower between mid-2015 and mid-2016. More recently, the copper-gold indicator peaked in June 2018, more than four months ahead of the 10-year’s peak of 3.2 per cent in November of that year. This indicator has been steadily falling since April, preceding the recent Treasury yield plunge.

Looking forward, we note that the copper-gold indicator has stabilized and appears to be poised to head higher. Should that occur, we would expect yields to follow suit. We will continue to monitor the copper-gold relationship for directional rate clues.