Rate Hike Odds Surge, 10-Year Yield Tops 5%: Why Isn't Gold Crashing?

Original title: "Fed Rate Hike Odds at 92% This Week, 10-Year Treasury Yield Breaks 5%: Why Hasn't It Crushed Gold?"
Original source: Wallstreetcn

Rising rate hike expectations pushing up risk-free rates, a stronger dollar, and higher oil prices are jointly exerting short-term pressure on gold prices, but safe-haven demand from geopolitical risks and long-term structural buying are providing an effective offset, keeping gold resilient at key levels. OCBC has raised its gold forecast, expecting gold to reach $4,600 per ounce by December 2026. The Fed rate hike expectations have surged and the 10-year Treasury yield has broken above the 5% psychological level, yet gold has not been crushed—behind this is a tug-of-war between inflation-hedging demand driven by geopolitical risks and interest rate pressure, reflecting deep contradictions in the current macro environment.

The sharp deterioration in the Middle East situation has become the core driver of this market move. According to Xinhua News Agency, Yemen's Houthi forces launched a new round of attacks on Saudi Arabia, prompting Saudi Arabia to immediately shut down the East-West oil pipeline, which transports about 4% of global oil supply. Oil prices subsequently climbed to around $107 per barrel, with Brent crude at $106.96 per barrel. The energy shock has reinforced market concerns about persistent inflation, and the CME FedWatch tool shows the probability of a 25-basis-point rate hike by the Fed this week has risen to about 92% to 93%. The 10-year Treasury yield briefly touched 5% intraday on Monday, the first time since October 2023.

However, gold has not collapsed under this combination of bearish factors. Spot gold is oscillating narrowly around $4,300, down more than 3% from its high of over $4,600 per ounce in late August, but still firmly holding support at the $4,000 level. Rising rate hike expectations pushing up risk-free rates, a stronger dollar, and higher oil prices are jointly exerting short-term pressure, but safe-haven demand from geopolitical risks and long-term structural buying are providing an effective offset, keeping gold resilient at key levels.

Supply Shock Combined with Rate Hike Expectations: Gold Under Pressure but Not Broken

Gold fell more than 1% on Monday to a five-week low, then stabilized slightly on Tuesday. Spot gold is at $4,298.86 per ounce.

From a logical chain perspective, rising oil prices → rising inflation expectations → increased certainty of Fed rate hikes → higher Treasury yields → stronger dollar, each link constitutes a bearish factor for gold. Gold does not generate interest, and during a rate-hiking cycle, its attractiveness relative to interest-bearing assets naturally declines.

But this logic has encountered a strong offset in the context of the current Middle East conflict. After the attack on Saudi Arabia's East-West pipeline, Saudi authorities have not yet stated when the pipeline will resume operations, nor clarified whether they can increase shipments through the Strait of Hormuz to make up for the shortfall. The persistent uncertainty in the supply outlook has maintained heightened market vigilance against inflation risks and geopolitical turmoil, supporting gold's safe-haven attributes.

Treasury Yield Breaks 5%: A Rate Hike Signal or a Resonance of Fiscal Worries?

The 10-year Treasury yield breaking above 5% is not the result of a single factor, but rather the resonance of multiple forces.

Inflationary pressure is the direct trigger. In August, U.S. CPI rose 3.4% year-over-year, core CPI rose 2.4% year-over-year but accelerated to 0.3% month-over-month, nonfarm payrolls increased by 162,000, and the unemployment rate held at 4.1%. This combination of "inflation not extinguished, employment resilient" has left the market with almost no dissent about a Fed rate hike at the September FOMC meeting. According to a Reuters survey, economists also expect at least one more rate hike within the year.

At the same time, fiscal factors are also persistently pushing up long-term yields. Public data shows that in the first 11 months of this fiscal year, U.S. net interest expense exceeded $1 trillion for the first time in the first 11 months of this fiscal year, and total federal debt surpassed $40 trillion. In addition, corporate bond issuance related to AI infrastructure construction has expanded sharply. According to Goldman Sachs data, hyperscale cloud computing service providers such as Alphabet and Amazon have issued about $194 billion in bonds this year, with full-year issuance expected to reach around $250 billion.

PGIM Credit Co-Chief Investment Officer Greg Peters said bluntly: "I keep asking myself, what could be the catalyst to push yields lower? Apart from a traditional economic recession, it's really hard to find other factors. The conditions for keeping yields high or even moving higher are fully in place." CreditSights Head of Investment Grade and Macro Strategy Zach Griffiths said the 10-year Treasury yield could potentially push further toward 5.5%.

What Is the Market Betting On: One Rate Hike, or "Higher for Longer"?

What really unnerves the market at this FOMC meeting is not the rate hike itself, but the policy path signals conveyed by the post-meeting dot plot and press conference.

According to Morgan Stanley's forecast, the Fed is expected to raise rates by 25 basis points each in September and December, citing the second-round effects of energy prices, strong demand driven by AI investment, the possibility that the neutral rate may be temporarily elevated, and considerations of maintaining monetary policy credibility.

On Treasury yields, Steven Barrow, Head of G10 Strategy at Standard Bank Group, raised his year-end forecast for the 10-year Treasury yield to 5.2%, and expects it to rise further to 5.3% in the first quarter of 2027. "One factor that makes me confident yields will break above 5% is that yields have already risen to near 5% without inflation data significantly exceeding expectations," Barrow said. He also expects the Fed to keep rates steady until the end of 2027 after hiking once each in September and December.

A team led by TD Securities strategist Gennadiy Goldberg believes that given the market has already priced in rate hike expectations substantially, yields will not spiral significantly higher due to the hike itself, but unless the economy shows signs of deterioration, long-term yields should generally remain at elevated levels through 2027.

OCBC FX analyst Christopher Wong noted that high oil prices, high Treasury yields, and waning risk aversion have jointly pushed the dollar higher, but with rate hikes fully priced in, further dollar gains would require the Fed to explicitly keep the option of continued tightening on the table.

Long-Term Support Remains, Institutions Raise Gold Price Targets

Despite undeniable short-term pressure, institutional investors' long-term outlook for gold has not reversed.

OCBC has raised its precious metals price forecasts, citing a higher price starting point, improved investment participation, and sustained structural demand. Chez Anbu, Head of OCBC Wealth Advisory, said gold's strong rebound in August reversed the previously weak trend, and the macro backdrop is improving. The bank now forecasts gold to reach $4,600 per ounce by December 2026, with a silver target of $69.70 per ounce.

From a price structure perspective, the support level around $4,000 per ounce established during the previous correction remains intact. Although gold fell more than 3% in September, it is still far above that bottom area.

For gold holders, the core logic of the current situation is: rate hikes raise the opportunity cost of holding gold, but the same drivers of rate hikes—inflation concerns triggered by energy shocks and geopolitical uncertainty—are also supporting gold prices. As long as the Middle East situation shows no significant easing, this internal tension will persist, and gold's safe-haven premium will not easily dissipate.