Metals Take a Dive as Yields Continue to Shoot Up

Markets dropped and yields rose amid concerns over the US debt maturity. The gold/silver ratio is providing an excellent entry point for silver.

Both gold and silver took a dive last week as markets were hit hard with rising interest rates. Gold is down 6% since the end of September, while silver declined by over 10%.

On Wednesday, the yield on 10-year Treasuries peaked at 4.8% — the highest level since before the Great Depression.

Stocks also took a big hit. The Dow Jones Industrial Average has given up nearly all its 2023 gains over the last two months. The S&P 500 has also lost ground, but is still up about 11% on the year.

Fortunately, this worrisome trend comes with a silver lining.

The recent spike in the gold/silver ratio opened up an excellent opportunity to position into silver. (When the ratio peaks, silver is undervalued; when it troughs, gold is undervalued.)

Why are yields spiking?

Though their remarks were hawkish, The Fed held interest rates steady at their last meeting. So why are bond yields continuing to skyrocket?

One explanation could be investors’ anticipation of the incoming credit crisis.

According to the U.S. Treasury, the federal government has just under $33 trillion in debt. US government agencies hold $7 trillion, while the remaining $26 trillion is held by the public — including foreign governments, individual investors, and institutions.

The United States’ debt to GDP ratio has not been this high since WWII, and we are not even in a war or a recession.

But today’s story isn’t about the size of government debt, but rather its maturity. In a rising interest rate environment, maturing Treasuries can cause quite a headache for the government, the US dollar, and the economy.

The Specter of Debt Maturity Looms

Based on data from the U.S. Treasury Monthly Statement of the Public Debt, 55% of outstanding government debt will mature by the end of 2026. This equates to over $14 trillion.

When bonds mature, the government must pay its bondholders the face value of the bonds they own. If the government can’t fully cover its obligations (and they can’t, because we are running at a deficit), they must sell more bonds and take on new debt.

This is no problem if interest rates are near zero. However, because interest rates have gone up so much, new debt is extremely expensive to service.

Currently, interest payments on the debt are almost equivalent to the government’s entire national defense budget. This means taxpayers are directly funneling their tax money to the owners of US bonds: primarily foreign governments and the top 1%.

This will keep getting worse as more and more debt matures, forcing the government to sell new bonds. The new supply of bonds will continue to push bond prices down and yields up (bond prices and yields are inversely correlated).

The Ghost of Fiscal Future

The government will need to sell $14 trillion of bonds in the next three years (plus all the additional short-term bonds that will be issued). The question is, who will buy them?

The entire GDP of the United States is only $27 trillion, which makes it difficult to absorb $14 trillion of new bonds over the next three years. Foreign governments typically buy a large share of US Treasuries, but right now many nations are currently trying to “de-dollarize” and reduce their Treasury holdings.

Even if investors and foreign governments become willing buyers of US government debt, it will be extremely difficult for the market to absorb the sheer quantity of new bonds.

In the end, the Federal Reserve may need to buy up the bonds in an attempt to soak up the new debt and suppress interest rates. Maybe they will call it “quantitative easing” again, or maybe they will concoct a new name for the same old game.

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