US Bond Markets Spell Trouble Ahead

yield inversion in US bond markets flashes financial trouble ahead

US bond markets spell trouble ahead, and they have been raising red flags for well over 3-1/2 months now. Since 13 May 2019, the 3-month UST bill’s yield has consistently surpassed the yield on the 30-year UST bond, with the exception of a few days. This is an event that should never happen a single time in a healthy economy, let alone for nearly every single day over a 3-1/2 month period. Furthermore, from the chart above, one can easily observe that this unhealthy inversion is growing as well, a second red flag regarding the extremely unhealthy status of US bond markets in recent months.

In simple terms, if you do not understand what this inversion means, under normal times, if you were going to tie up your money in an investment for 30-years versus 3-months, one would be compensated with a far greater return for choosing the 30-year period over the 3-month period for the simple reason that choosing the 30-year period translates into having to wait for the return of your money for a period of time that is 120 times longer than the 3-month period. Simple opportunity cost and time value of money factors necessitates that one should be compensated at exponentially higher rates for waiting 30-years for the return of your money versus just 3-months. The fact that one is now rewarded with higher yields in a 3-month UST bill versus a 30-year UST bond not only points to the fact that US bond markets spell trouble ahead, but that they spell enormous trouble ahead.

Currently, this inversion stands at -0.49%. The lowest this inversion has ever been in the past two decades, in December of 2000, was -0.77%, so keep an eye on this level. In the meantime, if this inversion keeps widening, the more it widens, the more I expect gold and silver prices to keep its upward trajectory.

J. Kim

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