Bonds vs Gold: Trading the Fiscal Dominance Divergence 1OZ1!/10Y1!COMEX:1OZ1!/CBOT_MINI:10Y1!mintdotfinanceThe Fed is expected to cut rates next week. Yet, the long-term Treasury yields refuse to come down. This disconnect signals that markets are no longer taking their cues from monetary policy alone. Heavy government borrowing, record bond issuance, and fading foreign demand are driving yields higher, a case of fiscal pressure overwhelming the Fed. The 30-year treasury yield this year has been around the levels seen before the 2008 market crash. Record issuance, foreign retrenchment, and sticky inflation have pushed term premia higher, leaving U.S. debt markets increasingly exposed to the kind of investor pushback, or ‘bond vigilante’ pressure, that has already destabilised markets like the UK. Globally, the lesson from the 2022 UK gilt crisis highlights how deficits and fiscal experimentation can quickly destabilise “risk-free” treasury assets. Against this backdrop, gold stands out not only as a symptom of market stress but also as an indicator of systemic uncertainty and a tradeable hedge in an era of stagflation. In today’s note, we hold the view that Treasuries remain under pressure while gold strengthens, supported by central-bank diversification, led by China. A Market Drowning in Supply The traditional easing cycle, where Fed rate cuts pull down yields, seems to be breaking down. With deficits above 6% of GDP in peacetime, Treasury supply now overwhelms demand. Foreign central banks, which are historically reliable marginal buyers, are now retreating. China has steadily reduced holdings, leaving domestic institutions and private markets to absorb the record issuance. Auction coverage ratios, or bid-to-cover ratios, a key gauge of investor appetite for Treasury securities, have steadily weakened, with recent 10-year sales drawing among the lowest bids of the amount offered in three years. The ratio at 2.35 is also 8.20% lower than the average of the past six auctions: Source: CME TreasuryWatch Over the past three years, the only instance where the ratio fell further below its six-auction moving average was in November 2022, when it was 8.61% lower than the MA6: Source: MacroMicro The latest 30-year bond auction also cleared with a bid-to-cover ratio of 2.27, well below the 2.43 average seen across the previous ten auctions. The last time it was this low was in November 2023. Historically, coverage nearer to a little over 2.5x was sustained by foreign central banks. Source: Thornburg But with countries like China now reducing holdings, private investors now demand higher yields to absorb issuance. Weak coverage has also amplified intraday swings, underscoring how Treasury volatility is increasingly supply-driven (as against being policy-driven). The dynamic underscores a structural shift: Treasuries are being increasingly priced as fiscal risk assets, and not merely monetary policy instruments. The UK Gilt Crisis: A Cautionary Tale The United States is not alone in testing bond market tolerance. There are other precedents, and not too far in the past. In late 2022, the UK government announced large unfunded tax cuts and spending plans, a fiscal package which was perceived by the markets to lead to a large deficit, and one that was unsustainable. Gilt yields spiked more than 100 basis points within days, the sharpest move in decades. Source: BoE This sudden rise hammered pension funds that had used derivatives to hedge liabilities through “liability-driven investment” (LDI) strategies. As gilt prices collapsed, these funds faced margin calls and were forced to dump assets to raise cash, creating a vicious cycle of selling and further yield spikes. The chart below shows how different investor groups reacted. LDIs were forced to dump gilts, driving their flows sharply negative. In contrast, others stepped in as buyers, taking advantage of the sell-off to accumulate bonds at higher yields. This highlights how forced selling by one sector can destabilise markets, while opportunistic buyers step in only once prices have fallen enough. Source: BoE The turmoil only stopped when the Bank of England stepped in with an emergency bond-buying program (the blue-dashed line), pledging to purchase long-dated gilts to restore order. In effect, the central bank had to act as a buyer simply to prevent a financial-stability crisis, ending at the green-dashed line, following which LDI flows started increasing. The gilt episode showed how quickly bond markets can punish fiscal missteps. When large deficits collide with skeptical investors, governments can lose the ability to fund themselves smoothly. That same tension now looms over the United States, where record issuance is testing the limits of bond market tolerance. Gold as Hedge and Signal Gold’s surge to a record $3,500/oz also reflects a deeper structural shift in how central banks manage reserves. As Treasuries lose some of their “risk-free” status in the eyes of investors, gold has re-emerged as a preferred hedge. Its traditional correlation with real yields has weakened; today, deficits, de-dollarisation, and reserve diversification are stronger drivers of the gold narrative. China is at the centre of this transformation. The People’s Bank of China bought 225 tons of gold in 2023, 44 tons in 2024, and another 21 tons so far in 2025, raising official reserves to around 2,300 tons. Source: Reuters Yet this is still well below what analysts view as necessary for an economy of China’s scale. Long-term targets range between 5,000 and 8,000 tons, implying years of sustained demand in the coming years. The precedent of Russia’s frozen reserves after its 2022 invasion of Ukraine has also reshaped central-bank behaviour. Gold, unlike dollar assets, cannot be sanctioned or seized if held domestically. For developing economies, where uncertainty has become systemic, this makes gold a uniquely secure store of value. That institutional bid, layered on top of investor demand, is a structural tailwind likely to support prices well beyond just short-term cycles. Hypothetical Trade Setup With U.S. 10Y Treasuries under supply-driven pressure even as the Fed eases, and gold benefiting from diversification flows, traders can express this divergence via a Treasury–Gold spread trade: Sell CME 10Y Treasury Yield Futures (10YU5) Buy CME Gold Futures (10ZZ5) The CME 10-Year Yield future is the benchmark instrument for expressing views on U.S. rate markets, a cleaner vehicle than cash Treasuries in this context because it isolates yield exposure. The 1-Ounce Gold future offers scalable precision compared to the standard 100-oz gold contract, making it ideal for tactical spread strategies. Together, they provide liquidity, transparency, and efficient margining to trade this macro divergence. The 10-Year Yield future (10YU5) is quoted in percentage points of yield, with each 0.001 index point worth $1 per contract. At the current level of 4.082%, the contract is effectively valued at about 4,082. By comparison, the 1-Ounce Gold future (10ZZ5) is quoted in dollars per ounce, currently trading at $3,653. In other words, one Treasury yield contract and one gold contract are already of a similar scale. Profit at Target Upside: 895 to 1000 = +105 points P/L: $429 per spread Loss at Stop Downside: 895 to 810 = –85 points P/L: –$347 to –$427 per spread depending on leg slippage Reward-to-Risk Ratio 105 / 85 = 1.24× MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. 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