Gold’s Record Rally and Rising Bond Yields: A Fiscal Policy Dilemma

The 2025 investment landscape has been defined by a paradox: long-term bond yields and gold prices have risen in tandem, defying their traditional inverse relationship. This divergence reflects deepening fiscal policy risks, shifting investor sentiment, and a global reallocation of capital toward safe-haven assets. As U.S. budget deficits widen and geopolitical tensions escalate, the interplay between government debt markets and gold has become a critical barometer for macroeconomic stability.

Fiscal Policy Risks and Bond Yield Volatility

The U.S. Treasury’s 10-year yield climbed to 4.28% in July 2025, driven by concerns over debt sustainability and the Federal Reserve’s delayed response to inflationary pressures [4]. Rising deficits, exacerbated by infrastructure spending and tax cuts, have eroded investor confidence in the U.S. government’s ability to manage its $34 trillion debt load. This fiscal strain has pushed capital away from long-term bonds, where yields now reflect a premium for risk. The 10-year Treasury swap spread—a key indicator of fiscal stress—has widened to its highest level since 2020, signaling market skepticism about the U.S. economy’s long-term resilience [2].

Gold as a Fiscal Hedge

While gold typically moves inversely to bond yields, 2025 has seen both assets rise simultaneously. Gold prices surged past $3,527 per ounce by September 2025, fueled by a confluence of factors: a weaker U.S. dollar, central bank demand, and geopolitical risks [3]. The Federal Reserve’s pivot toward rate cuts has reduced the opportunity cost of holding non-yielding assets like gold, while the dollar’s decline—nearly 11% year-to-date—has made gold more accessible for international buyers [1]. Central banks, particularly in emerging markets, have added 710 tonnes of gold to reserves in 2025 alone, with 95% of reserve managers expecting further increases due to de-dollarization trends and currency devaluation fears [5].

Investor Sentiment and Asset Reallocation

The reallocation of capital between bonds and gold has been stark. Global gold ETFs attracted 170 tonnes of inflows in Q2 2025, with Asian-listed funds accounting for over half of the total [2]. Meanwhile, U.S. Treasury yields have widened relative to other high-grade sovereigns as investors shift capital away from dollar-denominated assets. This trend is underscored by the iShares Gold Trust (GLD), which saw 397 tonnes of inflows in the first half of 2025, pushing total holdings to a five-year high [3].

The Fed’s expected rate cuts later in 2025 may temper bond yields, offering a more favorable risk-reward profile for government and corporate bonds [5]. However, gold’s appeal as a hedge against fiscal and geopolitical risks remains robust. Central banks and institutional investors are increasingly balancing gold with other assets, such as Bitcoin, to diversify portfolios amid macroeconomic convergence [5].

Macroeconomic Implications

The U.S. dollar’s declining dominance—its share of global reserves fell to 57.8% by year-end 2024—has accelerated the shift toward gold and other reserve currencies [1]. This structural change reflects broader concerns about U.S. fiscal policy and the stability of the global financial system. While the Fed’s rate cuts may stabilize bond markets, the long-term trajectory of gold is likely to remain upward, supported by central bank demand and geopolitical volatility.

For investors, the key takeaway is clear: fiscal policy risks and asset reallocation dynamics are reshaping the investment landscape. Gold’s record highs and rising bond yields are not isolated phenomena but interconnected signals of a world grappling with debt, inflation, and geopolitical uncertainty.

Source:
[1] Gold’s Record Rally Amid Diverging Central Bank Policies [https://www.ainvest.com/news/gold-record-rally-diverging-central-bank-policies-weakening-dollar-2509]
[2] You asked, we answered: Are fiscal concerns driving gold? [https://www.gold.org/goldhub/gold-focus/2025/06/you-asked-we-answered-are-fiscal-concerns-driving-gold]
[3] Gold Mid-Year Outlook 2025 [https://www.gold.org/goldhub/research/gold-mid-year-outlook-2025]
[4] How US Fiscal Concerns Are Affecting Bonds, Currencies, ... [https://www.goldmansachs.com/insights/articles/how-us-fiscal-concerns-are-affecting-bonds-currencies-stocks]
[5] Is 2025 (finally) the Year of the Bond? [https://www.morganstanley.com/im/en-us/individual-investor/insights/global-fixed-income-bulletin/is-2025-the-year-of-the-bond.html]