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Outlook 2017

Brace for a New World of Rising Treasury Yields

Editor's Note: Kitco News has officially launched its 2017 Outlook where we ask if this is the start of a new Raging Bull market. Be sure to catch all our coverage here, which includes gold forecasts, special technical reports and of course, our popular Invest Like The Experts Series. We will also be launching a new feature so be sure to stay tuned!

(Kitco News) - A fairy godmother seemingly waved her wand in November and a whole new economic world has formed. The stock market hit new all-time highs, Wall Street analysts are expecting faster economic growth and higher levels of inflation—and expectations for a brand new economic landscape were built into financial markets in the span of a short six weeks.

What does this mean for U.S. Treasury yields?

More of the same—rising rates ahead. Since the election of Donald Trump to the White House, the yield of the 10-year Treasury note has soared from 1.77% on November 4 to as high as 2.62% on Dec. 15. In the world of Treasury yields –that is a huge move in a short period of time.

Prepare your portfolios now because it could be a bumpy ride ahead.

"Treasury yields, equities, the dollar, and consumer confidence have all soared since Election Day. In Donald Trump, Americans elected a bull. But come Inauguration Day, Trump will enter a china shop," warns Philip Diehl, a former Chief of Staff of the U.S. Treasury and current President of U.S. Money Reserve.

The long-term trend in falling Treasury yields may finally be ending. For perspective, the U.S. 10-year Treasury yield stood at 8.16% in November 1994 and has been trending lower since then –recently hitting a bottom at 1.33% in July 2016.

"I believe the U.S. Treasury market is entering a new phase," says Wayne Schmidt, chief investment officer at Gradient Investments in Arden Hills, MN.

Schmidt explains: "In the old phase -- last eight years -- the market was reflective of slow economic growth -- 1-1.5 percent, zero fiscal policy from Washington, no inflation and a Federal Reserve forced to the sidelines. In the new environment, growth expectations are being targeted in the 3-3.5 percent range, fiscal budgets are back in play, inflation is likely to move higher if the growth goals are achieved, and the Federal Reserve will have room to maneuver. Rates will move higher in an orderly fashion."

Bill Northey, chief investment officer with The Private Client Reserve of U.S. Bank also expects rates to move higher in 2017, but at a more modest pace than market's have experienced since November.

  2017 Range     2-Year Yield 

10-Year Yield

Bill Northey



Wayne Schmidt 

near 2.00% by year-end


"Conventional wisdom says that Trump's debt-fueled stimulus plan, higher inflation expectations, and a strong dollar will raise 10-year Treasury yields another 50 to 150 basis points next year," Diehl says.

"I'm looking for something at the lower end of that range, as I doubt the Fed will be as aggressive on interest rates as Fed Chair Yellen suggested two weeks ago.  I also doubt Congress will pass a stimulus package as large as what Trump's people have suggested.
As reality sinks in, I expect Treasury yields to follow a pattern similar to 2013 and 2014: a strong, short rally followed by volatility and a decline as growth expectations are disappointed," Diehl adds.

Inflation, Finally!?

Inflation is finally expected to return to the scene after years of limp and languishing price increases. There are some competing forces that remain, however.

Inflation appears to be rebounding from low levels based on rising energy prices and a somewhat tighter labor market, Northey says.

"However, the stronger dollar has tempered the acceleration of inflationary pressures. 
Inflation pressures in the U.S. should remain modest but may be impacted by stimulus measures from the incoming administration and Congress," Northey adds.

"If we get some added inflation, we can all celebrate the fact we were able to avoid dreaded deflation. The Federal Reserve will lead this celebration and this will provide some cover for them to return to a more normal monetary policy," Schmidt says.

Risks to the View

As always there is potential for unexpected events to emerge that could throw a wrench into current views and forecasts. As U.S. Treasuries remain a critical safe-haven investment vehicle, any event that triggers flight-to-quality buying could impact Treasuries.

  1. Geopolitical Risk. "Whether it comes from terrorist attacks or regional conflicts, it could cause a flight to quality, which could be bullish for Treasuries," Schmidt says.

  2. Economic Conflicts including trade wars, sanctions or oil supply disruptions could cause yields to move higher and become more volatile, Schmidt adds.

China Has Been Selling Our Debt

There has been concern about how potential trade frictions or even a trade war could impact the economy and financial markets. Schmidt downplays potential impact on the U.S. Treasury market.

Schmidt explains: "China has already sold down $.16 trillion of U.S. debt over the past three years to support their currency, the yuan. China currently owns $1.15 trillion of U.S. debt, now second to Japan. With $19 trillion of debt to go around, I don’t think China will have a major impact on rates should trade wars materialize. At the end of the day each side needs each other."

What This Could Mean For Gold – Longer-Term

"I don't expect to see foreign investors moving away from the dollar in 2017. Support for the dollar will be coming from too many directions next year," Diehl says.

Looking beyond 2017, "I think we'll see a long-term trend away from dollar-denominated investments as foreign investors and central banks hedge their portfolios against a falling dollar. Gold owners will be primary beneficiaries of this development," Diehl concludes.

By Kira Brecht,




Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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