Gold is Gradually Replacing Treasuries at the Heart of the Global Monetary System

For several trading sessions now, the U.S. bond market has been sending a signal that stands in stark contrast to the prevailing narrative. While the consensus continues to attribute the rise in yields to a U.S. economy that is more resilient than expected, the reality appears far more concerning. It is not growth that is currently driving up sovereign yields, but rather a combination of a gradual resurgence in inflation expectations and a profound shift in the composition of U.S. debt buyers.

Since July 17, the yield on 2-year U.S. Treasury notes has risen by nearly 30 basis points, while the 10-year and 30-year yields have risen by 14 and 10 basis points, respectively:

 

 

A move like this is rarely insignificant. It comes at precisely the moment when several inflationary factors — which the market has largely underestimated in recent months — are beginning to reassert themselves.

The first, of course, concerns energy:

 

 

For several weeks now, we have been explaining that the price of oil quoted on the futures markets no longer reflects the tensions observed in the physical market. The short positions accumulated in futures have long served to artificially suppress prices, but this situation is becoming increasingly difficult to sustain as physical imbalances worsen. Distillate inventories remain extremely low, refining margins are still at historically high levels, and trade flows remain disrupted in several strategic regions.

Yet it is precisely these distillates — diesel, heating oil, and kerosene — that fuel the entire global economy:

 

 

They determine the cost of road, sea, and air transportation, as well as that of much of the manufacturing and agricultural sectors. Rising energy costs are generally one of the primary channels through which inflation spreads to the rest of the economy. The bond market now appears to be beginning to price in this reality, even as official inflation statistics continue to reflect past conditions.

This rise in inflation expectations, however, is occurring in a much more delicate context than in previous cycles. The problem no longer lies solely in price trends, but equally in the United States’ ability to finance ever-larger budget deficits from an investor base that is undergoing profound change.

For several years now, central banks have been gradually reducing their exposure to U.S. Treasury bonds.

China provides the most striking example of this. Its holdings of U.S. sovereign debt have fallen to their lowest level since 2008, confirming a diversification strategy that has been underway for many years:

 

 

This shift is not merely a tactical adjustment: it reflects a broader desire to reduce dependence on the dollar in the management of official reserves.

Japan, too, is sending an interesting signal, even if its motivations are different. As the largest foreign holder of Treasuries, Tokyo had, on the contrary, increased its purchases in recent months to indirectly support the dollar and limit upward pressure on the yen. However, this strategy appears to be reaching its limits. The latest statistics show a dramatic drop in Japanese holdings of Treasuries in May, with a decline of approximately $70 billion in a single month:

 

 

Part of this shift can naturally be explained by technical adjustments or reserve management operations, but above all, it serves as a reminder that even the United States’ largest creditor cannot indefinitely absorb the surge in U.S. financing needs.

In other words, the two largest foreign holders of U.S. debt are now moving in a direction that no longer favors the U.S. bond market. China is gradually reducing its exposure for geopolitical and monetary reasons, while Japan is forced to increasingly prioritize the stability of its own currency and domestic bond market. This shift is occurring precisely as the U.S. Treasury must finance record deficits, which automatically increases the amount of debt that private investors will have to absorb.

At the same time, central bank purchases of gold continue at a pace rarely seen in recent history. The rise in the price of gold is now amplifying this phenomenon to the point that a highly symbolic threshold has just been crossed: the market value of official gold reserves held by central banks now exceeds that of their Treasury holdings:

 

 

This shift obviously does not mean that the dollar is ceasing to be the primary international currency, but it reflects a gradual change in the perception of U.S. sovereign risk. Central banks continue to hold dollars to ensure liquidity for their international transactions, but they are now choosing to transfer a growing portion of their strategic reserves to an asset that is not the debt of any government.

Moreover, this reallocation is not limited to central banks. In China, inflows into gold-backed ETFs remain near all-time highs, while imports of physical gold are rebounding sharply:

 

 

Official, institutional, and private purchases are thus moving in the same direction, reinforcing a trend that goes far beyond mere speculation:

 

 

In this context, the key indicator to watch is likely no longer the nominal yield on the 10-year Treasury but its real yield. The real yield now stands at 2.34%, its highest level since 2023. This rise reflects a profound shift in investor expectations. For more than a decade, central banks have kept real interest rates near zero or even negative, allowing governments to finance their deficits at historically low costs. Today, investors are demanding a yield more than two percentage points above expected inflation in order to agree to finance the U.S. government.

In other words, the market is demanding a higher return even as the volume of debt to be absorbed continues to rise. This trend stems as much from the surge in the U.S. Treasury’s financing needs as from the gradual withdrawal of several structural buyers. The Federal Reserve is continuing to reduce its balance sheet, China is gradually selling its Treasuries, and many central banks are now favoring gold in the management of their reserves. The private sector must therefore absorb a growing amount of public debt, which can only be achieved through higher yields.

This combination is particularly unfavorable for financial assets. Sustained higher real interest rates automatically increase the cost of capital, reduce the present value of future cash flows, and make the valuations established during the era of cheap money much harder to sustain. If this rise in yields were now to be accompanied by a genuine resurgence of energy-driven inflation, central banks would face a particularly delicate trade-off: supporting increasingly indebted governments or keeping rates high enough to prevent a new surge in inflation.

The bond market thus appears to be the first to reflect a trend that equity markets continue to largely ignore. Behind the rise in sovereign bond yields lies, in reality, a much more profound transformation of the international monetary system, characterized by a gradual shift in global reserves toward gold, reduced dependence on U.S. Treasury bills, and the return of a real cost of money that investors had not experienced in over a decade. It is likely this quiet realignment — far more than the daily fluctuations in economic statistics — that is the true focus of the market today.

The credit sector is also beginning to sound the alarm about AI

The rise in sovereign bond yields is not just a problem for the U.S. Treasury. It is now beginning to spill over into the corporate credit market, including the sector that is currently driving most of the stock market optimism: the hyperscalers engaged in the race for artificial intelligence. 

Since February, credit spreads for the major AI players have widened significantly. Investors are now demanding nearly 154 basis points above Treasuries to buy their bonds, compared with about 118 basis points just a few months ago. This is the highest level observed since Goldman Sachs created this index.

This trend may seem modest in absolute terms, but it is particularly revealing. The credit spread measures the risk premium demanded by investors to finance a company rather than the U.S. government. Its widening means that bond markets are beginning to demand a higher return, either because they perceive greater risk or because they anticipate a massive supply of new issuances.

And that is precisely what is on the horizon.

The major hyperscalers are expected to invest nearly $5.5 trillion in their artificial intelligence infrastructure by 2030. A significant portion of these investments will be financed by the investment-grade bond market, which will need to absorb an additional volume of issuances each year representing approximately 3.5% of its outstanding balance. By way of comparison, the net inflows that traditionally fuel this market rarely exceed 3.1% per year. In other words, the current equilibrium rests on an extremely narrow margin.

This strain is already evident in recent bond issuances. While at the start of the year new bonds from hyperscalers attracted demand nearly five times the amounts offered, this coverage ratio has now fallen below two times. Investors are therefore becoming much more selective at the very moment when financing needs are skyrocketing.

This trend stands in stark contrast to the behavior of the stock markets. Since February, the stock index tracking major AI players has remained near its highs and is still up by about 3%, even as their financing conditions are rapidly deteriorating.

This divergence deserves investors’ full attention. Historically, credit markets have often been the first to detect financial strains before they become apparent in the equity markets. Creditors are primarily concerned with companies’ ability to refinance their debt, while shareholders generally remain focused on earnings growth. When these two markets begin to tell different stories, it is rarely the credit market that ends up being wrong.

In an environment where sovereign yields continue to rise due to inflation expectations and the surge in public financing needs, this gradual deterioration in credit conditions could quickly become the main obstacle to the massive investment cycle in artificial intelligence. Yet this cycle is currently the main driver of U.S. stock market valuations. If the cost of capital continues to rise, the entire narrative of the “AI bubble” could gradually be called into question, well before the equity markets fully realize it.