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  • Spot gold prices have been under pressure for the entire Thursday session as real yields have rallied hard.
  • US Core PCE data on Friday is the next flashpoint to watch out for that could trigger more yield upside.

It’s been another ugly day for spot gold (XAU/USD) prices, which have been under pressure for pretty much the entire session in tandem with US bond markets, which have also been selling off for pretty much the entire session. That bond market sell-off, which has been all that market participants have been talking about, has seen US 5 and 7-year bond yields surge nearly 20bps, the 10-year yield surge nearly 15bps (to above 1.50%) and the 30-year yield rally just over 5bps.

Of particular concern for precious metals markets, which are negatively correlated to real US bond yields, the 10-year TIPS yield has rocketed to fresh eight-month highs and is now close to the -0.6% mark, an incredible rally given that the bond started the day with a yield of under -0.8%. Needless to say, this is the biggest move in real yields since the Covid-19 pandemic induced market panic back in Q1 2020.

Compounding gold’s problems is 1) the fact that the larger rally in real yields than in nominal yields has pushed down inflation; 10-year break-evens are down 3bps on the day to 2.12%, down from last week’s highs above 2.20% (remember that precious metals like higher inflation expectations), and 2) the rise in US bond yields is improving the US’s real rate advantage over some of its G10 rivals, triggering inflows into USD and has triggered a sell-off in equities, which is causing safe-haven demand related inflows into the USD. Note that precious metals are also inversely correlated with the US dollar.

Yields are surging… What next?

The question on the mind of investors/market participants as they leave their desks on Friday is two-fold; 1) how much further can this bond market sell-off run? and 2) how long until the Fed changes its tune and what might then do to cap yields?

The first is pretty much impossible to answer at this stage as the sell-off seems very much driven by market psychology rather than fundamentals (i.e. panic selling, capitulation and stop losses being triggered). Some market commentators have pointed out that if January Core PCE inflation (the Fed’s favoured inflation guage) comes in hotter than expected then that could be the catalyst for a further leg higher in bond yields. If that does happen, expect more USD strength and likely more precious metal downside.

The second question is another one that one can only speculate about. One trigger point that might force the Fed to act is if the stock market sell-off starts to get ugly, i.e. a 10% or more drop. As the bank has shown time and time again in the past, when the stock market really starts to tank, they can be bullied into action. In terms of what they might do, some Fed members are already talking about the potential for the Fed to adjust the weighted average maturity of its bond-buying programme towards longer-term bonds (called a “twist”). Such a move might take the steam out of further longer-term bond yield upside, but might not be seen as “enough” by equity investors.

Alternatively, the Fed could announce yield curve control, i.e. capping bond yields at a certain level by pledging to buy bond in unlimited amounts to keep yields there. The only problem with this is that if it is inflation expectations that are driving yields higher, more QE in potential unlimited size will further increase the money supply and further boost inflation expectations and upside pressure on yields (some have compared the YCC policy to fighting a fire with petrol). More simply, the Fed could just announce an expansion of its monthly asset purchases, which are currently $120B per month ($80B of which are treasuries).


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