One signal, two prices
On Monday the yield on Japan's benchmark 10-year government bond rose to 2.95 per cent, a 30-year high, and the yen showed fresh signs of weakness. Markets tied the move to their reading of the speech Kevin Warsh gave at Jackson Hole on 28 August, which they took as leaving the door open to further rate increases if above-target inflation persists.[1]
In metals the move was far smaller. Gold closed down 0.18 per cent at 4,446.50 dollars an ounce and silver rose 0.16 per cent to 66.36 dollars. Futures pricing, by contrast, lifted the odds of a Fed increase at the September meeting to 66.1 per cent from 57 per cent on Friday; the 10-year Treasury yield stood at 4.75 per cent and Brent traded above 90 dollars.[2]
Between the path and the premium
Both prices responded to the same change in expectations, but the size of the two reactions diverged: Japan's long end reached a 30-year high while gold closed down 0.18 per cent. That divergence points to a repricing concentrated in the policy path of the next few meetings; a durably higher inflation premium would be expected to show up more clearly in a non-yielding metal. This may not be the only reading: inflation and bond supply conditions specific to Japan may also have pushed the long-end yield higher independently of the Fed signal.[1], [2]
On 29 August this column noted that the post-Warsh move was concentrated at the front of the US curve and that equity holders had not yet weighed the same change in the discount rate. That observation still stands, but the pricing has crossed a border: the waiting long end opened this time in Japan. The threshold that makes the distinction observable is this: the move's limits can be read from whether the 10-year Japanese government bond yield stays above 2.95 per cent after the Fed's September meeting.[1], [3]