Is the market pricing wrong? Gold and US Treasuries: One is always lying
2025-10-28 20:52:06
On Tuesday (October 28), spot gold continued its correction, falling below the key $4,000 level to a low of $3,886 per ounce before recovering slightly to around $3,922. Since reaching an all-time high of $4,381.29 on October 20, the commodity has fallen over 10%, though increased intraday volatility has failed to reverse the downward trend. Meanwhile, the US dollar index remained near 98.6880, having recently traded in a narrow range between 98 and 99.5. This contrasts sharply with gold's sharp decline, highlighting the dominance of non-dollar factors in the current market. The 10-year US Treasury yield has experienced a rollercoaster ride, briefly returning above 4% on Monday before quickly falling back to 3.985%, closing at 3.982% yesterday. This subtle shift reflects the market's wait-and-see attitude ahead of the Federal Reserve's FOMC meeting, renewing the appeal of US Treasuries as a safe-haven asset. Overall, at the beginning of this week, the recovery of risk appetite and policy expectations intertwined, driving funds to rotate between gold and US bonds, and in the short term there may be a tug-of-war around key technical levels.
The Federal Reserve's policy path remains the market's anchor. Under the baseline scenario, the probability of a 25 basis point rate cut at the October 28-29 FOMC meeting has climbed to 96%. Coupled with the narrowing disagreement regarding an additional rate cut before the end of 2025 in the September meeting minutes, the market is pricing in near-100% probability of rate cuts in both October and December. Inflation data also provided support. The month-over-month CPI increase released on October 24th was 0.2 percentage points lower than expected, further strengthening the appeal of interest-free assets like gold and paving the way for lower US Treasury yields. Slowing economic growth expectations—the GDP forecast has been revised down to 1.8%—also reinforce this baseline, pushing yields closer to the 3.9% range. Over the past week, the 10-year yield has gradually fallen from 4.02%. While gold is under pressure, it remains a structural bull case in the medium term.
However, over the past 24 hours, unexpected news factors caused actual market movements to deviate from expectations, with gold prices experiencing a particularly sharp decline. Reputable analysts pointed out that the meeting between US and Chinese leaders in Malaysia on October 27th to discuss trade cooperation was interpreted by the market as a temporary easing of tensions. This signal weakened safe-haven demand, prompting a rapid shift of funds toward the stock market, with Wall Street indices hitting new highs and gold prices experiencing a larger-than-expected 3% intraday pressure. This development, clashing with underlying geopolitical uncertainties (such as the aftermath of the Middle East conflict), became the primary driver of gold's pullback. Investor profit-taking further amplified the effect. In the morning trading of October 27th, COMEX gold futures opened down 0.4%, cumulatively falling over 2% during the day. This was driven by concentrated liquidation of short-term speculative positions following a record high, as well as net outflows of over $1 billion from ETFs over the past week. While the seasonal decline in demand following India's Diwali festival was a minor factor, the overall volatility of the US dollar index (which rose only 0.1% intraday) suggests that the current decline in gold prices is limited to its direct correlation with the US dollar index and is more likely a continuation of a news-driven flash crash.
U.S. Treasury yields fluctuate more closely to the baseline, but deviations from the market also exacerbate downward pressure. The risk of a U.S. government shutdown escalated on October 27th, with congressional negotiations collapsing again and entering their fourth week. This triggered a flight-to-safety influx of funds into U.S. Treasuries. Investors worry that fiscal uncertainty could drag down fourth-quarter GDP growth by 0.5 percentage points, exceeding the assumption of a soft landing, pushing yields down 2-3 basis points intraday. While signals of trade cooperation boosted the stock market and indirectly reduced upside inflation risks, impacting U.S. Treasuries neutrally, the shutdown remains the most significant disruption over the past 24 hours. Regional economic data also compounded the woes. On October 27th, the Philadelphia Fed Manufacturing Index plummeted to -12.8, well below the expected +9.5. Both employment and new orders declined, reinforcing recession fears. While not a national indicator, it amplified expectations of a Fed rate cut, causing yields to briefly hit a low of 3.97%. From a funding perspective, prominent reports indicate that overnight trading volume for 10-year Treasury bonds was below normal, narrowing the yield range to 1.5 basis points. While briefly returning above 4% in early trading, it quickly retreated following the firm opening of the GC repo rate (4.35%). This suggests that the outflow of liquidity (induced by the $26 billion settlement on the first day of the week) is amplifying short-term pressure. While the Federal Reserve's repo facility provides a backstop (raising $8.4 billion yesterday), the market awaits the FOMC's decision, and yields may continue to test the 4% mark.
Expectations of the end of quantitative tightening (QT) are also permeating fundamentals. Institutional analysts believe that while the end of QT isn't imminent, once it begins, it will trigger tens of billions of dollars in annual reinvestments, primarily in US Treasuries with maturities exceeding 10 years. This will significantly absorb long-term supply and depress term premiums. With the Federal Reserve's balance sheet currently stable at $6.5 trillion, MBS maturing proceeds may shift to pure US Treasury reinvestment, further supporting the downward yield curve. In contrast, gold's safe-haven narrative has temporarily waned following the trade easing, but the Fed's dovish tone continues to provide a bottom-line support.
From a technical perspective, the daily spot gold chart shows a clear correction channel since the October 20 high of $4,381.29. The Bollinger Bands are narrowing, suggesting shrinking volatility and a possible directional breakout. The MACD indicator's DIFF line is currently at 80.46, while the DEA line is at 120.88. Negative divergence between the two is fueling bearish momentum. However, the RSI has retreated to 46.08, entering neutral territory and approaching oversold levels. Combined with the intraday rebound from the low of $3,886, this suggests a potential for near-term stabilization before the FOMC. The narrow range-bound trading of the US dollar index (98-99.5) further confirms that gold's price is becoming more independent, with non-traditional negative correlations dominating.
The technical chart for the 10-year US Treasury yield is more stable. It briefly broke through 4% on Monday morning (after briefly testing higher after closing at 3.982% yesterday), but quickly retreated to 3.985%. A small head-and-shoulders pattern has formed on the daily chart, with the neckline near 3.97%. The decline from 4.02% over the past week is consistent with a descending channel. The RSI is neutral to weak, with the middle Bollinger Band providing support. If the outflow of funds continues (over $50 billion accumulated over three days this week), the yield could test the low of 3.95%. However, the 4% mark serves as a psychological anchor, spurring a bull-bear game. Leading institutions are assessing the tactical bias as "squaring," recommending watching for the 10-year yield to trade in a narrow range between 3.99% and 3.96%. The FOMC's results could potentially break the current stalemate.
Notably, details on the US Treasury funding market reinforce technical signals: GC repo opened up 2 basis points to 4.35%, above the 10-day average of 4.29% and 10 basis points above the upper limit of the interest rate corridor of 4.25%. Yesterday's RRP demand rose to $10.6 billion (up from $2.4 billion the day before), indicating tight liquidity. The current repo rate curve shows a 55 basis point demand premium for 5-year bonds, while 20-year bonds remain stable at 14 basis points, suggesting a growing appeal for long-term US Treasuries. This mirrors gold's oversold signal, suggesting a possible rotation between the two, with short-term volatility likely exacerbated by a data-intensive week.
Looking ahead to the next two to three days, US Treasury yields are likely to continue to fluctuate narrowly around the 4% mark. The downward trend in the underlying trendline supports a test of the 3.95% support level. However, positive spillover from QT reinvestment expectations and trade cooperation signals may limit declines. If the October 29th PPI data meets expectations (further cooling of inflation), combined with congressional developments, the yield curve may stabilize between 3.98% and 4.00%. Spot gold faces a more severe test. While the correction momentum remains unabated, technical oversold conditions and the confirmation of the Fed's rate cut offer a window for a rebound. A bottom is expected between $3,900 and $4,000. An unexpectedly dovish FOMC statement (e.g., hinting at a faster pace of rate cuts in 2025) could push gold prices back above $3,950. Conversely, continued weak regional data could exacerbate risk-off rotation, and a decline in US Treasury yields would indirectly support gold's stabilization.
This week's data schedule is packed. Tuesday (October 29th) will see the release of the Case-Shiller and FHFA house price indices (expected to decline 0.1% month-over-month and slow to 1.3% year-over-year), the consumer confidence index (down to 93.2), the Richmond and Dallas Fed regional surveys, and a $44 billion 7-year Treasury auction. If these indicators show weakening housing prices and confidence, this will reinforce recession pricing, push yields further downward, and fuel gold's safe-haven narrative. The draining of funds from the market may amplify volatility at its peak mid-week, but the cushioning effect of the Fed's repo facility cannot be ignored. Overall, the market is pricing in "perfection," and the FOMC outcome will be a turning point. The correlation between gold and Treasury bonds may reshape after the policy is implemented, so traders should be wary of the amplifying effect of news headlines.
Fundamentals intertwined: policy expectations and sudden changes dominate the trend
The Federal Reserve's policy path remains the market's anchor. Under the baseline scenario, the probability of a 25 basis point rate cut at the October 28-29 FOMC meeting has climbed to 96%. Coupled with the narrowing disagreement regarding an additional rate cut before the end of 2025 in the September meeting minutes, the market is pricing in near-100% probability of rate cuts in both October and December. Inflation data also provided support. The month-over-month CPI increase released on October 24th was 0.2 percentage points lower than expected, further strengthening the appeal of interest-free assets like gold and paving the way for lower US Treasury yields. Slowing economic growth expectations—the GDP forecast has been revised down to 1.8%—also reinforce this baseline, pushing yields closer to the 3.9% range. Over the past week, the 10-year yield has gradually fallen from 4.02%. While gold is under pressure, it remains a structural bull case in the medium term.
However, over the past 24 hours, unexpected news factors caused actual market movements to deviate from expectations, with gold prices experiencing a particularly sharp decline. Reputable analysts pointed out that the meeting between US and Chinese leaders in Malaysia on October 27th to discuss trade cooperation was interpreted by the market as a temporary easing of tensions. This signal weakened safe-haven demand, prompting a rapid shift of funds toward the stock market, with Wall Street indices hitting new highs and gold prices experiencing a larger-than-expected 3% intraday pressure. This development, clashing with underlying geopolitical uncertainties (such as the aftermath of the Middle East conflict), became the primary driver of gold's pullback. Investor profit-taking further amplified the effect. In the morning trading of October 27th, COMEX gold futures opened down 0.4%, cumulatively falling over 2% during the day. This was driven by concentrated liquidation of short-term speculative positions following a record high, as well as net outflows of over $1 billion from ETFs over the past week. While the seasonal decline in demand following India's Diwali festival was a minor factor, the overall volatility of the US dollar index (which rose only 0.1% intraday) suggests that the current decline in gold prices is limited to its direct correlation with the US dollar index and is more likely a continuation of a news-driven flash crash.
U.S. Treasury yields fluctuate more closely to the baseline, but deviations from the market also exacerbate downward pressure. The risk of a U.S. government shutdown escalated on October 27th, with congressional negotiations collapsing again and entering their fourth week. This triggered a flight-to-safety influx of funds into U.S. Treasuries. Investors worry that fiscal uncertainty could drag down fourth-quarter GDP growth by 0.5 percentage points, exceeding the assumption of a soft landing, pushing yields down 2-3 basis points intraday. While signals of trade cooperation boosted the stock market and indirectly reduced upside inflation risks, impacting U.S. Treasuries neutrally, the shutdown remains the most significant disruption over the past 24 hours. Regional economic data also compounded the woes. On October 27th, the Philadelphia Fed Manufacturing Index plummeted to -12.8, well below the expected +9.5. Both employment and new orders declined, reinforcing recession fears. While not a national indicator, it amplified expectations of a Fed rate cut, causing yields to briefly hit a low of 3.97%. From a funding perspective, prominent reports indicate that overnight trading volume for 10-year Treasury bonds was below normal, narrowing the yield range to 1.5 basis points. While briefly returning above 4% in early trading, it quickly retreated following the firm opening of the GC repo rate (4.35%). This suggests that the outflow of liquidity (induced by the $26 billion settlement on the first day of the week) is amplifying short-term pressure. While the Federal Reserve's repo facility provides a backstop (raising $8.4 billion yesterday), the market awaits the FOMC's decision, and yields may continue to test the 4% mark.
Expectations of the end of quantitative tightening (QT) are also permeating fundamentals. Institutional analysts believe that while the end of QT isn't imminent, once it begins, it will trigger tens of billions of dollars in annual reinvestments, primarily in US Treasuries with maturities exceeding 10 years. This will significantly absorb long-term supply and depress term premiums. With the Federal Reserve's balance sheet currently stable at $6.5 trillion, MBS maturing proceeds may shift to pure US Treasury reinvestment, further supporting the downward yield curve. In contrast, gold's safe-haven narrative has temporarily waned following the trade easing, but the Fed's dovish tone continues to provide a bottom-line support.
Technical signals: Convergence and oversold hint at a turning point
From a technical perspective, the daily spot gold chart shows a clear correction channel since the October 20 high of $4,381.29. The Bollinger Bands are narrowing, suggesting shrinking volatility and a possible directional breakout. The MACD indicator's DIFF line is currently at 80.46, while the DEA line is at 120.88. Negative divergence between the two is fueling bearish momentum. However, the RSI has retreated to 46.08, entering neutral territory and approaching oversold levels. Combined with the intraday rebound from the low of $3,886, this suggests a potential for near-term stabilization before the FOMC. The narrow range-bound trading of the US dollar index (98-99.5) further confirms that gold's price is becoming more independent, with non-traditional negative correlations dominating.
The technical chart for the 10-year US Treasury yield is more stable. It briefly broke through 4% on Monday morning (after briefly testing higher after closing at 3.982% yesterday), but quickly retreated to 3.985%. A small head-and-shoulders pattern has formed on the daily chart, with the neckline near 3.97%. The decline from 4.02% over the past week is consistent with a descending channel. The RSI is neutral to weak, with the middle Bollinger Band providing support. If the outflow of funds continues (over $50 billion accumulated over three days this week), the yield could test the low of 3.95%. However, the 4% mark serves as a psychological anchor, spurring a bull-bear game. Leading institutions are assessing the tactical bias as "squaring," recommending watching for the 10-year yield to trade in a narrow range between 3.99% and 3.96%. The FOMC's results could potentially break the current stalemate.
Notably, details on the US Treasury funding market reinforce technical signals: GC repo opened up 2 basis points to 4.35%, above the 10-day average of 4.29% and 10 basis points above the upper limit of the interest rate corridor of 4.25%. Yesterday's RRP demand rose to $10.6 billion (up from $2.4 billion the day before), indicating tight liquidity. The current repo rate curve shows a 55 basis point demand premium for 5-year bonds, while 20-year bonds remain stable at 14 basis points, suggesting a growing appeal for long-term US Treasuries. This mirrors gold's oversold signal, suggesting a possible rotation between the two, with short-term volatility likely exacerbated by a data-intensive week.
Short-term outlook: FOMC tug-of-war and potential turnaround
Looking ahead to the next two to three days, US Treasury yields are likely to continue to fluctuate narrowly around the 4% mark. The downward trend in the underlying trendline supports a test of the 3.95% support level. However, positive spillover from QT reinvestment expectations and trade cooperation signals may limit declines. If the October 29th PPI data meets expectations (further cooling of inflation), combined with congressional developments, the yield curve may stabilize between 3.98% and 4.00%. Spot gold faces a more severe test. While the correction momentum remains unabated, technical oversold conditions and the confirmation of the Fed's rate cut offer a window for a rebound. A bottom is expected between $3,900 and $4,000. An unexpectedly dovish FOMC statement (e.g., hinting at a faster pace of rate cuts in 2025) could push gold prices back above $3,950. Conversely, continued weak regional data could exacerbate risk-off rotation, and a decline in US Treasury yields would indirectly support gold's stabilization.
This week's data schedule is packed. Tuesday (October 29th) will see the release of the Case-Shiller and FHFA house price indices (expected to decline 0.1% month-over-month and slow to 1.3% year-over-year), the consumer confidence index (down to 93.2), the Richmond and Dallas Fed regional surveys, and a $44 billion 7-year Treasury auction. If these indicators show weakening housing prices and confidence, this will reinforce recession pricing, push yields further downward, and fuel gold's safe-haven narrative. The draining of funds from the market may amplify volatility at its peak mid-week, but the cushioning effect of the Fed's repo facility cannot be ignored. Overall, the market is pricing in "perfection," and the FOMC outcome will be a turning point. The correlation between gold and Treasury bonds may reshape after the policy is implemented, so traders should be wary of the amplifying effect of news headlines.
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
