With a 92% probability of a Fed rate hike this week and the 10-year Treasury yield breaking 5%, why hasn't it crushed gold?

Despite soaring expectations of a Fed rate hike and US Treasury yields breaking the psychological barrier of 5%, gold has not been crushed. This reflects the struggle between geopolitical risk-driven inflation hedging demand and interest rate pressures, revealing the deep-seated contradictions in the current macroeconomic environment.

The rapidly deteriorating situation in the Middle East has become the core driver of this round of market movements. According to Xinhua News Agency , the Houthi rebels in Yemen launched a new round of attacks on Saudi Arabia, prompting Saudi Arabia to shut down the East-West oil pipeline, which carries approximately 4% of the world's daily oil supply. Oil prices subsequently climbed to around $107 per barrel, with Brent crude trading at $106.96 per barrel. This energy shock has intensified market concerns about persistent inflation, with the CME FedWatch tool showing that the probability of a 25 basis point rate hike by the Federal Reserve this week has risen to approximately 92% to 93%. The 10-year US Treasury yield briefly touched 5% on Monday, the first time since October 2023.

However, gold did not collapse under the aforementioned combination of negative factors. Spot gold fluctuated narrowly around $4,300, down more than 3% from its high of over $4,600/ounce at the end of August, but still held firm on the $4,000 support level. Expectations of interest rate hikes pushing up risk-free interest rates, a stronger dollar, and rising oil prices all contributed to short-term pressure, but safe-haven demand driven by geopolitical risks and long-term structural buying effectively offset these factors, allowing gold prices to maintain resilience at key levels.

Supply shocks coupled with expectations of interest rate hikes put pressure on gold, but it did not collapse.

Gold prices fell more than 1% to a five-week low on Monday before recovering slightly on Tuesday. Spot gold was trading at $4,298.86 per ounce.

From a logical chain perspective, rising oil prices → increased inflation expectations → greater certainty of a Fed rate hike → higher US Treasury yields → a stronger dollar—each link in this chain constitutes a negative factor for gold. Since gold does not generate interest, its attractiveness relative to interest-bearing assets naturally decreases during a rising interest rate cycle.

However, this logic has been strongly countered by the current Middle East conflict. Following the attack on Saudi Arabia's East-West pipeline, Saudi Arabia has not yet stated when the pipeline will resume operation, nor has it clarified whether it can increase shipments through the Strait of Hormuz to make up for the shortfall. This continued uncertainty about the supply outlook has maintained the market's high level of vigilance regarding inflation risks and geopolitical instability, supporting gold's safe-haven appeal.

US Treasury yields break 5%: Is this a signal of interest rate hikes or a reflection of fiscal concerns?

The 10-year US Treasury yield breaking through 5% is not due to a single factor, but rather the result of multiple forces converging.

Inflationary pressures were the immediate trigger. In August, the US CPI rose 3.4% year-on-year, while core CPI rose 2.4% year-on-year but accelerated to 0.3% month-on-month. Non-farm payrolls increased by 162,000, and the unemployment rate remained at 4.1%. This combination of "unabated inflation and resilient employment" led to virtually no market disagreement that the Federal Reserve would raise interest rates at the September FOMC meeting . According to a Reuters poll, economists surveyed also expected at least one more rate hike this year.

Meanwhile, fiscal factors continue to push up long-term yields. Public data shows that in the first 11 months of this fiscal year, US net interest expenses exceeded $1 trillion for the first time in history, and total federal debt surpassed $40 trillion. Furthermore, corporate bond issuance related to AI infrastructure construction has expanded dramatically. According to Goldman Sachs, hyperscale cloud computing service providers such as Alphabet and Amazon have issued approximately $194 billion in bonds this year, and the total issuance for the year is expected to reach around $250 billion.

Greg Peters, co-chief investment officer of PGIM Credit, stated bluntly: "I've been asking myself, what could be the catalyst for lower yields? Aside from a traditional economic recession, it's hard to find any other factors. The conditions for keeping yields high and even rising further are fully in place. " Zach Griffiths, head of investment grade and macro strategy at CreditSights, added that the 10-year Treasury yield could potentially push further towards 5.5%.

What is the market betting on: one rate hike, or "higher and longer"?

What truly captivated the market at this FOMC meeting was not the interest rate hike itself, but rather the policy path signals conveyed by the dot plot and press conference following the meeting.

Morgan Stanley predicts that the Federal Reserve will raise interest rates by 25 basis points each in September and December, citing the secondary effects of energy prices, strong demand driven by AI investment, the possibility that the neutral interest rate may be temporarily too high, and considerations for maintaining the credibility of monetary policy.

Regarding US Treasury yields, Steven Barrow, head of G10 strategy at Standard Bank of South Africa, raised his year-end forecast for the 10-year US 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 that yields will break through 5% is that we've already reached levels close to 5% despite inflation data not significantly exceeding expectations," Barrow said. He also expects the Federal Reserve to maintain stable interest rates until the end of 2027 after raising rates once each in September and December.

A team led by TD Securities strategist Gennadiy Goldberg believes that given the market has already largely priced in rate hike expectations, yields will not rise significantly out of control due to the rate hikes themselves. However, unless there are signs of economic deterioration, long-term bond yields should generally remain at a high level in 2027.

OCBC foreign exchange analyst Christopher Wong pointed out that high oil prices, high US Treasury yields, and weakening risk aversion have jointly boosted the US dollar, but with interest rate hikes already fully priced in, further dollar appreciation would require the Federal Reserve to clearly retain the option to continue tightening.

Long-term support remains, and institutions have raised their target prices for gold.

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

OCBC has raised its precious metals price forecasts, citing higher starting prices, improved investor participation, and continued support from structural demand. Chez Anbu, head of OCBC's wealth advisory division, stated that gold's strong rebound in August reversed its previous weakness, with the macroeconomic backdrop improving. The bank now forecasts gold to reach $4,600 per ounce by December 2026, and a target price of $69.70 per ounce for silver.

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

For gold holders, the core logic of the current situation is that interest rate hikes have increased the opportunity cost of holding gold, but the same drivers of these hikes—inflationary concerns stemming from energy shocks and geopolitical uncertainty—are also supporting gold prices. As long as the situation in the Middle East does not show significant easing, this inherent tension will persist, and gold's safe-haven premium will not easily dissipate.

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