We've talked this week about the sharp move higher in bond yields.
The market has effectively reversed the Fed's September interest rate cut. And as we observed in my note yesterday, the futures market positioning is at extreme levels (leaning heavily toward the view of even higher yields).
Is the market right? Has the Fed miscalibrated with its September cut and the projected easing cycle?
Let's take a look at a leading indicator for the 10-year Treasury yield. It's the copper-gold ratio.
The ratio of copper prices-to-gold prices tends to trade tightly with the 10-year yield. And historically divergence between the two has resolved with the 10-year yield closing the gap (i.e. following the path of the copper-gold ratio).
That said, we get the November Fed decision in two weeks, just following the election. The expectations are for the Fed to follow its half point rate cut in September with a less aggressive quarter point cut in November.
But the level of rates remain in highly restrictive territory (putting downward pressure on the economy) and this sharp rise in bond yields has effectively tightened financial conditions since the last meeting.
