Long-term U.S. Treasury yields have increased significantly since the end of 2020 and now provide a positive real return. However, with the prospect of a widening Middle East conflict that could cause oil prices to spike, and a widening deficit and Washington dysfunction weighing on the U.S. credit rating, investors may find gold and commodity hedge funds effective against inflation and geopolitical concerns.
Positive real yield: With inflation running below 4% and the 10-year Treasury yield at 4.53% as of Nov. 15, holders are getting a positive real yield — a reversal from the past couple of years. Economists expect both to fall over the next few years to 3.6% and 2.3%, respectively.
10-year Treasury yield and CPI
Higher debt: Rising U.S. debt has raised concerns about higher Treasury yields. At fiscal-year-end 2022, debt to GDP was 123%, or 97% after excluding government holdings. The OMB expects these debt levels to increase to 130% and 107% by the end of fiscal 2028.
U.S. debt as a percentage of GDP
Gold hedge: Gold prices tend to move in the opposite direction of real interest rates, which have fallen to 2.22% from 2.46% at the end of October. If there's a flight to safety, interest rates could drop, and that could prove beneficial to gold prices.
Gold vs. Treasury yields
Commodity hedge: The HFRI Macro: Commodity index has a low correlation to the S&P 500 and Bloomberg U.S. Aggregate Bond indexes; from 2013 to 2022 it returned 4.5% with 8.8% volatility, compared with 12.5%/16.6% and 1.1%/6.2% for the others, respectively.
Commodity hedge funds vs. equity and fixed-income indexes
Sources: U.S. Department of the Treasury, Bloomberg, Office of Management and Budget, HFR