Gold intermarket: tracks 2-yr treasury yield, flattening of the yield curve could be bad news

Gold prices and two-year treasury yield are both vulnerable to sharp rise/drop in the Fed rate hike bets. The first indication of shift in the market expectations regarding Fed rate hike possibility are seen in the bond markets, especially at the short-end of the curve.

Consequently, the two-year yield has acted as an advance indicator for gold traders.

2-yr yield dropped after Fed rate decision

Fed kept the doors open for a rate hike in September, although it is very much data dependent. Markets had clearly positioned for a more hawkish stance, which is evident from the weakness in the two-year treasury yield following the Fed decision.

The yield bottomed out at 0.538% on July 6 and clocked a high of 0.778% yesterday before falling to 0.73%. Meanwhile, Gold resumed the latest drop on July 11 and ticked higher yesterday after 2-year yield retreated post Fed meeting.

However, the yield curve has become flatter post Fed meet, which to some extent indicates rate hike bets have gone up. Hence, 2-yr yield may stay resilient and that could cap the gains in the yellow metal. At the time of writing, the metal was trading around $1337/Oz (yesterday’s high was $1342.47), while the 2-yr yield was largely unchanged on the day around 0.7%.