February 5, 2025

QuickTakes

Bessent Follows Yellen’s Lead &

Gold Price Rises To New High

The bond market relaxed today after Treasury Secretary Scott Bessent's debut Quarterly Refunding Announcement (QRA) proved to be a non-event. The 10-year Treasury yield fell 9bps to 4.43%, its lowest level since the Federal Reserve's last rate cut, in mid-December (chart).

Bessent had been critical of Janet Yellen's usage of short-term Treasury bills to finance the federal budget deficit. Many investors, therefore, worried that he would issue more longer-term notes and bonds, which would boost bond yields. The QRA said that auction sizes for notes and bonds would remain the same for the coming quarters, which means that bills will remain at a historically high percentage of the Treasury market for the foreseeable future (chart). This also is a positive for the stock market.

Of course, it’s much easier to criticize policy actions from outside the room. An increase in auction sizes would likely upset both the bond and stock markets, and probably President Trump as well. We believe Bessent is still interested in normalizing the Treasury's debt issuance but will likely wait until at least Q4, once the Fed has stopped reducing its balance sheet and he can provide enough forward guidance. Debt issuance has already started to normalize somewhat. As of the 12 months ended November, more notes are hitting the Street than bills (chart).

While the 10-year yield rattles around our expected range of 4.25%-4.75%, there seems to be nothing that can stop the bull market in gold. It's up 40% over the past year to a new record high of $2,871 per ounce (chart). That's more than 18 percentage points greater than the S&P 500's price gain over the same time frame. Over the past five years (since just before the pandemic), both the price of gold and the US stock market benchmark are up by roughly 82%.

Since President Richard Nixon ended the gold standard in 1971, gold has been a de minimis portion of international reserves (chart). But America's weaponization of financial sanctions against Russia since the Ukraine war has kicked off a new cycle for official gold use (chart).

Central banks and other authorities have scooped up gold out of fear that the US would eventually boot them from the global financial system, aiding the price of gold and encouraging speculators to join them along the way.

The same reasoning has likely boosted the price of bitcoin, which can be used by pariah states and others not just as a store of value but also for payments. Against the price of gold, the cryptocurrency is even more richly valued than it was during the 2021 meme-stock mania (chart).

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