Gold Intermarket: 2-year treasury yield remains in the driver’s seat

Gold has been closely following the action in the 2-yr treasury from mid April, suggesting the markets have been pricing-in a June Fed rate hike post Macron’s win in the first round of the French elections.

The drop in the EU political uncertainty not only reduced the haven demand for the metal, but also opened doors for another Fed rate hike in June. Moreover, Le Pen’s victory could have rattled markets, forcing the Fed to delay the rate hike.

The 2-year treasury yield bottomed out at 1.16% in mid April, while the metal topped out at a high of $1295 on April 17.

The yield now trades around 1.35%, while the metal clocked a low of $1214 levels this week. The sell-off in the metal looks relatively exaggerated due to the drop in the safe haven demand.

The CME data shows the probability of a June rate hike stands above 80%, which is well above the 70% mark the Fed needs before moving rates higher. This suggests a limited scope for further gains in the yield (losses in gold) unless the markets tarts pricing-in the Fed’s plans to trim its balance sheet size later this year.