10-year Treasury yields reach 3%, gold takes a hit – Daily Market Brief, May 3, 2022

  • 10-year Treasury yields rose to 3% for the first time in more than 3 years
  • Gold fell to a 3 ½ month low, owing to its lack of yield
  • Day ahead: The ECB’s Lagarde speaks, US factory orders
  • AUD/USD in focus after the RBA meeting

Wall Street turned lower on Monday, reversing earlier gains – and setting up a weak start in Europe on Tuesday. US Treasury yields crossing the 3% barrier for the first time since 2018 seemed to spook traders, who quickly exited bullish positions on the news.

Bond markets spook equities

It was in 2018 when yields were last rising this fast – and reached this high – that Wall Street briefly entered a bear market when the S&P 500 fell over 20% from its record high. The end result was that the Fed pivoted from a hawkish policy back to a dovish one. The Fed had ended QE and was in the middle of QT when it quickly began increasing the size of its balance sheet again. This was a move that many referred to as the ‘Powell put’, where the Fed essentially back-stopped financial markets.

With a 50-basis point hike on the table for this week, and the S&P 500 down approximately 14% from its high, it doesn’t seem like a Fed put is coming yet – but if there will be one, the 3% Treasury yield probably brought it closer.

Gold fallout

Rising US bond yields coupled with a rising dollar tends to mean bad news for gold, and that’s what we’ve been seeing. XAU/USD struck a 3 ½ month low on Monday, unable to build on the 2-day gain last week that topped at $1920 per oz. The price has fallen sharply since a failed test of the $2000 price level in mid-April.

The Russian invasion of Ukraine had provided a source of haven flows, which have now completely reversed as of the beginning of May. The renewed focus for gold is on monetary policy, which means higher yields and less demand for assets without a yield like gold.

AUD/USD get a lift after bigger rate hike

As was suspected would be the case, the Reserve Bank of Australia raised rates – but what was less expected was the size of the hike. The RBA caught economists off guard with a 25 bp hike instead of 15bps, which had been the consensus. The move really flipped the script on the cautious tone of their past few meetings. The move was especially notable given that the central bank has rarely taken such actions during a national election campaign.

AUD/USD rose as much as 1.4% in reaction to the surprising decision, before giving up part of the gains. With the RBNZ and BoC both having made 50 bps hikes in recent weeks and the Fed set to follow this week, the RBA has now moved more into line with the other major global central banks in the fight against rising inflation. That could be a tailwind for Aussie crosses moving forwards as markets realign.

Day Ahead

ECB President Lagarde speaks: 13:00 GMT

US factory orders: 14:00 GMT

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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