Wednesday seemed to be a very uneventful day, as the developed equity markets appeared to tread water. The fall in the US treasury yields, the reason for which seems to be puzzling most investors, continued today and the US 10-year now only yields 2.44%. The Financial Times on Tuesday speculated that the Chinese caused the fall in yields. This maybe the case; it could also be another sign of continued investor caution after the steep rise in equities, as some investors are cashing in profits happy to sit in treasuries. Another cause of the fall in US yields is possibly a reaction to the fall in European peripheral bond yields. Spanish 10-year bonds, after the rise in the past year, now only offer a yield advantage of less than one half a per cent over US treasuries, not much of a risk premium. One thing is for sure, not many experts had predicted that US treasury yields would fall as the Federal Reserve tapered its purchase of them.
What has surprised us is the fall in treasury yields has not been accompanied by a rise in the gold price. The Gold price fell on Wednesday to $1258 an ounce, a 12-month low. We have pointed out in the past how the gold price has reflected the move in US treasury yields, as treasury yields have risen the gold price has fallen and visa versa. Both assets are considered as a flight to safety, possibly for different reasons, both assets are priced in US dollars. Gold is a currency that has no yield, when US treasuries are offering a real yield as they have done in the past year gold becomes less attractive. As the real yield on US treasuries fall, gold should become a more attractive investment. Why this has not occurred so far on this occasion is a mystery.
It still feels like there are plenty of bricks for the bears to build the wall of worry. The recent performance of small cap stocks being one, concerns over the implications of the recent European elections being another, China and the unexplained fall in US treasury yields are others. US equities have now gone for nearly 2 years without a correction of 10%, Goldman Sachs believes a correction of this nature happens to equities every 1-2 years so we may be getting closer to an equity market correction, and there will be plenty of "I told you so", when it happens.