Skip to main content
The Globe and Mail
Support Quality Journalism
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); }

The sharp decline in U.S. bond yields has been by far the most powerful driver of asset market returns in recent months, and the next stage of the trend could have very positive implications for the loonie.

The Federal Reserve led the world’s central banks in pushing bond yields well below future inflation expectations, and this has had profound effects on market prices. Chairman Jerome Powell’s intention was to help Main Street by making borrowing and investing attractive for businesses, thus mitigating the negative effects of COVID-19 on economic growth and employment. Investors responded to the lower rates by buying everything in sight. Well, except banks.

The rally in the gold price is arguably the clearest example of the market effects of ultralow interest rates and bond yields. The U.S. 10-year inflation-adjusted bond yield is now below negative 1 per cent, meaning investors in 10-year Treasuries can expect to lose more than 1 per cent annually on their money once inflation is taken into account.

Story continues below advertisement

These negative returns make U.S. bonds a dubious store of value and spending power and make gold look more attractive for those purposes as a result. The first accompanying chart shows the close association between U.S. real (inflation-adjusted) bond yields and the gold price. Note that the bond yields are plotted inversely to better show the trend – gold climbs as real rates fall.

The past 12 months have seen the bullion price rally in proportion to the extent that U.S. inflation-adjusted yields have fallen. Gold should continue to rally if yields fall.

Historically, falling bond yields have also had a positive effect on price-to-earnings ratios for the S&P 500. The premise here is that as bond yields fall, the potential earnings yield on equities (profits divided by price, the inverse of the PE ratio) draws investment assets into stocks that previously would have gone to fixed income.

The second chart shows that from November of 2018, the steady drop in real bond yields has been followed by PE ratios rising, with the notable exception of March, 2020, during the market downdraft. In this framework, the current high valuations in U.S. markets are justified by low yields.

Gold U.S. $/oz

U.S. 10-year inflation-adjusted

bond yield (inverted)

$2,150

-1.5

1,950

-1.0

1,750

-0.5

1,550

0.0

1,350

0.5

1,150

1.0

950

750

1.5

July 12,

2013

July 12,

2014

July 12,

2015

July 12,

2016

July 12,

2017

July 12,

2018

July 12,

2019

July 12,

2020

S&P 500 PE

Ratio Forward

U.S. 10-year inflation-adjusted

bond yield (inverted)

28

-1.5

26

-1.0

24

-0.5

22

0.0

20

18

0.5

16

1.0

14

1.5

12

10

2.0

July 12,

2013

July 12,

2014

July 12,

2015

July 12,

2016

July 12,

2017

July 12,

2018

July 12,

2019

July 12,

2020

Bloomberg U.S. Dollar

Spot Index

U.S. 10-year inflation-adjusted

bond yield (inverted)

1,350

1.5

1,300

1.0

1,250

0.5

1,200

1,150

0.0

1,100

-0.5

1,050

-1.0

1,000

950

-1.5

July 12,

2013

July 12,

2014

July 12,

2015

July 12,

2016

July 12,

2017

July 12,

2018

July 12,

2019

July 12,

2020

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: scott barlow; bloomberg

Gold U.S. $/oz

U.S. 10-year inflation-adjusted

bond yield (inverted)

$2,150

-1.5

1,950

-1.0

1,750

-0.5

1,550

0.0

1,350

0.5

1,150

1.0

950

750

1.5

July 12,

2013

July 12,

2014

July 12,

2015

July 12,

2016

July 12,

2017

July 12,

2018

July 12,

2019

July 12,

2020

S&P 500 PE

Ratio Forward

U.S. 10-year inflation-adjusted

bond yield (inverted)

28

-1.5

26

-1.0

24

-0.5

22

0.0

20

18

0.5

16

1.0

14

1.5

12

10

2.0

July 12,

2013

July 12,

2014

July 12,

2015

July 12,

2016

July 12,

2017

July 12,

2018

July 12,

2019

July 12,

2020

Bloomberg U.S. Dollar

Spot Index

U.S. 10-year inflation-adjusted

bond yield (inverted)

1,350

1.5

1,300

1.0

1,250

0.5

1,200

1,150

0.0

1,100

-0.5

1,050

-1.0

1,000

950

-1.5

July 12,

2013

July 12,

2014

July 12,

2015

July 12,

2016

July 12,

2017

July 12,

2018

July 12,

2019

July 12,

2020

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: scott barlow; bloomberg

Gold U.S. $/oz

U.S. 10-year inflation-adjusted

bond yield (inverted)

$2,150

-1.5

1,950

-1.0

1,750

-0.5

1,550

0.0

1,350

0.5

1,150

1.0

950

750

1.5

July 12,

2013

July 12,

2014

July 12,

2015

July 12,

2016

July 12,

2017

July 12,

2018

July 12,

2019

July 12,

2020

S&P 500 PE

Ratio Forward

U.S. 10-year inflation-adjusted

bond yield (inverted)

28

-1.5

26

-1.0

24

-0.5

22

0.0

20

18

0.5

16

1.0

14

1.5

12

10

2.0

July 12,

2013

July 12,

2014

July 12,

2015

July 12,

2016

July 12,

2017

July 12,

2018

July 12,

2019

July 12,

2020

Bloomberg U.S. Dollar

Spot Index

U.S. 10-year inflation-adjusted

bond yield

1,350

1.5

1,300

1.0

1,250

0.5

1,200

1,150

0.0

1,100

-0.5

1,050

-1.0

1,000

950

-1.5

July 12,

2013

July 12,

2014

July 12,

2015

July 12,

2016

July 12,

2017

July 12,

2018

July 12,

2019

July 12,

2020

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: scott barlow; bloomberg

Okay, now for the loonie. The Bloomberg Dollar Spot Index – which measures the greenback’s value versus the United States’ largest trading partners, including Canada – has fallen 9.1 per cent since the 2020 market bottom on March 23. The loonie has appreciated by 8.7 per cent over the same period. These are both sizable intra-year moves for currencies.

In an Aug. 5 research report, Credit Suisse trading strategist Shahab Jalinoos argued that falling U.S. real yields are “the most important foundation for [the trend of U.S. dollar] weakness” and that “the underlying trend likely remains in a USD negative direction.” This bearish outlook for the U.S. dollar is, of course, bullish for the Canadian dollar.

The subjective reasoning behind the connection between the value of the U.S. dollar and real yields revolves around foreign buying of U.S. bonds. When yields are as low as they are now, non-U.S. investors will look for higher yields elsewhere in the world, and this weakens the greenback in global currency markets.

Story continues below advertisement

The third chart compares U.S. inflation-adjusted yields to the trade-weighted U.S. dollar index. The relationship between the lines is far more tenuous than in the previous two charts, where correlation is obvious. In this case, the two measures track reasonably closely between January, 2015, and November, 2018, but otherwise go their own ways.

At this point, the divergence between yields and the U.S. dollar index is extremely wide. There’s no guarantee that the two lines on the chart will reconnect (although they certainly could). But if Mr. Jalinoos is rightly attributing recent dollar weakness to falling real yields, the chart implies that the dollar has a long way to fall to fully price in their effects. By extension, this means a lot of potential upside for the loonie.

Andrew Garthwaite, Credit Suisse’s prominent global strategist, says he believes current trends have a long runway. He predicts that the Federal Reserve will maintain downward pressure on yields as U.S. employment fully recovers from the pandemic.

In the end, Mr. Garthwaite expects real yields to fall from the current level, around negative 1 per cent, to negative 2 per cent. In this event , investors can expect much higher gold prices and a much higher stock market as PE ratios continue higher. And just maybe, clear sailing higher for the loonie.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies