Silver slumps back into mid-$25.00s as USD and bond yields rally
- Spot silver has dropped back into the mid-$25.00s in the last few hours, pressured by rising US bond yields.
- Market commentators attribute US fiscal optimism as the main driver behind the move.
Spot silver (XAG/USD) markets have been under selling pressure for the most part since the start of Friday’s trading session, with the precious metal having dropped from above the $26.00 level at the start of Asia Pacific trade to below the $25.50 level more recently.
Driving the day
The driver of the move has been the typically bearish combination of strength in US government bond yields and the US dollar; overnight and seemingly despite a lack of any new fundamental catalysts, US government bond yields started to rally and the 10-year yield is now up more than 8.5bps on the day from the low 1.50s% to above the 1.60% level. This has pushed the US dollar higher, with the DXY now back at the 91.90 mark and eyeing a test of the 92.00 level from Thursday’s lows in the 91.30s.
Market commentators are attributing the rise in US government bond yields to 1) the fact that US President Joe Biden signed his $1.9T stimulus “rescue” package into law on Thursday, providing a strong boost to the near-term outlook for the US economy and 2) amid increased chatter regarding the next US fiscal stimulus package, which will focus much more heavily on rejuvenating US infrastructure and could have a price tag of well above the bill that was just passed.
Just as the $1.9T package boosts the near term outlook, a multi-trillion infrastructure package, which is likely to invest over the course of the next four years, would provide a serious boost to the longer-term outlook for the US growth path – a key question amongst market participants right now is whether this will lead to the US economy overheating and the Fed tightening policy earlier than currently priced in by markets. The greater these fears, the higher yields and the US dollar will go. This would, of course, be bad for the likes of silver and gold.
In terms of fundamental developments of note on Friday; the US Producer Price Inflation report for February does not seem to have left a lasting market impact, but certainly will feed into the “inflation” narrative that has been sending US government bond yields higher; headline PPI showed a YoY growth rate of 2.8%, slightly above expectations for a jump from 1.7% to 2.7%. Much of this rise is as a result of base effects, i.e. weakness in producer prices this time last year as the US economy went into lockdown for the first Covid-19 wave. The question is, will all the fiscal and monetary stimulus translate into higher rates of inflation over a longer period of time.