Lending Association

Gold and Oil continue their rally in the face of rising bond yields

Worry about the Middle east and don’t bet on a rate cut this year emerged as the new market paradigms on Tuesday, if another day of rising gold and oil prices and Treasury bond yields are any guide.

Comments questioning the likelihood of a rate cut from a couple of key Fed members sent yields higher, along with gold but the US dollar eased and Wall Street saw a widespread fall.

But that was tempered late in the session as fears about a rise in Middle east tensions from new Israeli attacks and Iranian threats overrode the rising concerns about tightening bond yields.

The yield on 10 US Treasuries rose, ending around 4.35%, up just over 3 points (a long way from Monday’s 13 point bounce).

Strikingly the yield on the 10 year notes was easing in early Asian dealings. The US dollar index also eased as the Aussie dollar bounced back over the 65 US cent level.

Some traders saw signs of safe haven buying in US dollar assets like bond as those problems around Israel, Iran, Syria and Gaza continue to escalate.

This overcame some ‘reality’ from two senior Fed members. First up, Cleveland Fed President Loretta Mester said she still expects interest rate cuts this year but ruled out the next policy meeting in May.

Mester also thinks the long-run federal funds rate will be higher than the long-standing expectation of 2.5%. Instead, she sees the so-called neutral or “r*” rate at 3% (as we pointed out last week).

And San Francisco Fed President Mary Daly said that three reductions this year is a “very reasonable baseline” though she pointed out that nothing is guaranteed.

The rise in bond yields didn’t have an impact on gold – or oil – as renewed fears about the Middle East proved too strong.

The Comex June contract was around $US2,970.10 an ounce around 7.30am Sydney time Wednesday – up nearly 1.8% for the day after touching an all time high of $US2,300 an ounce in regular trading.

The front month settled at $US2,276.40 an ounce, up nearly $US40 an ounce on the day and $US46 an ounce since the Thursday before the long Easter break.

Analysts said safe-haven demand was a big factor on Monday and Tuesday as geopolitical tensions in the Middle East ratcheted up. Technical buying is also seen in both precious metals amid bullish charts.

Comex May silver was last up more than 4% at $US26.20 an ounce

Crude oil rose sharply on those Middle East tensions with West Texas Intermediate (WTI) crude hitting a five month plus high as supply remains tight.

WTI crude for May delivery closed up $US1.44 to settle at $US85.14 per barrel, the highest since late October, while June Brent crude, the global benchmark, was up $US1.46 at $US88.88.