Monetary Monday

Looking at key assets related to our Monetary system.

As central banks around the globe have begun to reduce interest rates, there's mounting pressure on the Federal Reserve to do the same. While the July Fed meeting may be too soon for a rate cut, it wouldn't be surprising to see one announced by September. Let's delve into various assets that are closely tied to our monetary system.

Yields

Bond yields are exhibiting a pattern of lower highs and lower lows, potentially signaling a cyclical peak. Notably, both the 2-year and 10-year yields have recently reached new 65-day lows. This trend suggests that bond investors are starting to brace for slower growth and are factoring in potential rate cuts from the Fed later this year.

The yield curve, particularly the 10-year to 2-year spread (10y2y), is steepening and has reached new 3-month highs following its recent breakout. After 24 months of inversion, we'll likely see continued steepening as 10s2s follow the rest of the curve (30y5y un-inverted & 30y2y roughly flat, currently).

This spread is also closely mirroring the movements in the June 2025 Fed Funds Rates Futures market, indicating market expectations for future interest rate policies. The market is currently pricing in a Fed Funds rate of 375bps 1 year from now.

Gold

Despite the backdrop of elevated real yields, gold has been on an impressive ascent, reaching new highs. Traditionally, there is an inverse relationship between real yields and gold prices—higher real yields typically lead to lower gold prices. However, the last 15 months have contradicted this historical trend, suggesting a shift in market dynamics that could exert further downward pressure on yields.

US Dollar

The US Dollar Index (DXY) is currently exhibiting weakness, sitting at 3-month lows and below its 200-day moving average. This decline suggests a potential change in trend, with the dollar weakening. As yields decrease, the attractiveness of the dollar may diminish, prompting investors to look for opportunities elsewhere.

Bank Stocks

From an equity perspective, banks have been performing robustly, evidenced by a recent breakout and a positive trend relative to the broader market index.

Conclusion

Looking at various assets intertwined with our monetary system, we hope to shed light on some intriguing deviations from historical norms, especially in the relationship between gold and real yields, and the concurrent strength observed in both the banking and gold sectors. The weakening dollar and the steepening yield curve hint at possible shifts in the broader economic and monetary landscape as investors brace for rate cuts & slower growth ahead. These developments have significant implications for portfolio strategies as we move through the 2nd half of this year.