The repurchase of U.S. Treasuries instead raises long-term bond yields, PPI inflation heats up while gold prices rise: Will tonight's U.S. CPI exceed expectations?

Last night (September 10) was the most information-dense day in the global market in nearly a month, and also the day with the most contrasting market performance: the U.S. Treasury increased the single long-term bond repurchase scale from the previously announced $4 billion to $6 billion, resulting in the 10-year U.S. Treasury yield rising to 4.85%, a new high since November 2023; the U.S. August PPI month-on-month growth met expectations, but July data was revised up by 0.1%, pushing the probability of interest rate hikes directly to nearly 70%. However, gold prices briefly fell before turning around and rising, forming a V-shaped pattern; Europe was also not calm last night. The European Central Bank announced a simultaneous increase of 25 basis points in three key interest rates, with the deposit facility rate rising to 2.50%, marking the second rate hike this year; the neighboring Bank of Japan is also poised to act, with the market pricing in a 97% probability of a 25 basis point rate hike to 1.25% next week. From Frankfurt to Washington to Tokyo, the major central banks around the world have rarely aligned in the same tightening direction. Everyone's attention is focused on the U.S. CPI to be released tonight.

I. Market Contrast One: $6 Billion Repurchase Hits, Yet Yields Reach New Highs

The amount of the repurchase by the Treasury was three times the usual operation, yet it still fell short of market expectations? On August 19, the Treasury first announced it would increase the single long-term government bond repurchase scale from $2 billion to "at least $4 billion," and last night the actual repurchase amount further increased to $6 billion. However, the market sold long bonds even cheaper— the 10-year U.S. Treasury yield once rose to 4.85%, a new high since November 2023; the 30-year yield broke above 5.3%. The main reason for this round of selling is not inflation expectations, but rather that buyers are systematically retreating, and the demand side for U.S. bonds is collapsing.

First, sovereign funds are withdrawing. The world's largest sovereign wealth fund, Norway's Government Pension Fund Global (AUM approximately $2.34 trillion, holding about $215 billion in U.S. bonds), sent a letter to the Norwegian Ministry of Finance on September 1, proposing to reduce the weight of government bonds in the benchmark index from 70% to 50%, and to reduce the allocation of U.S. bonds from 34.1% to 21.9%, corresponding to a reduction of about $80 billion, with funds shifting to corporate bonds and MBS. Wall Street's "big bull" Lacy Hunt, who has been bullish on U.S. bonds for 40 years, has also turned bearish, cutting the duration of his portfolio from about 21 years to less than 1 year.

Second, the yen's interest rate hike is drawing away the largest chunk of overseas buying. Japan holds about $1.1 trillion in U.S. bonds, making it the largest overseas holder. The probability of the Bank of Japan raising rates by 25 basis points to 1.25% in September has reached about 97%. As domestic yields rise, the carry trade funds that previously bought U.S. bonds with cheap yen are now flowing back. By May 2026, Japan's holdings had dropped to $1.143 trillion, a monthly decrease of about $67 billion; Japan and the UK reduced their holdings by $26.4 billion and $8.7 billion in June, respectively, while Turkey nearly emptied its entire position.

Third, while the demand side is contracting, the supply side is still expanding. The federal deficit for fiscal year 2026 is expected to be about $1.9 trillion to $2.1 trillion, compounded by refinancing existing debt and tech companies issuing bonds; meanwhile, the proportion of "price-insensitive" buyers such as central banks and foreign reserve management institutions is decreasing, while the proportion of private investors is increasing, meaning that the same scale of selling will cause a greater price impact. Charu Chanana, Chief Investment Strategist at Saxo Bank, assesses that due to inflation, fiscal risks, and a large amount of bond issuance, bond investors are demanding a higher risk premium, making it increasingly likely for the 10-year U.S. Treasury yield to rise to 5%. Therefore, "repurchases leading to rising yields" is not a technical accident, but a public vote—what the market is panicking about is not the interest rates, but the credit of the U.S. government.

II. Market Contrast Two: PPI Pushes Inflation Up, Gold Prices Drop Then Rise Again?

What did the PPI announce last night? What impact does the revised July data have on gold? The U.S. August PPI rose 0.4% month-on-month, meeting expectations, and rose 5.4% year-on-year, slightly higher than the expected 5.3%. What truly made the market nervous was the revised figures: the July PPI month-on-month was revised from previously reported flat to up 0.1%, and year-on-year from 4.7% to 4.8%, with two consecutive months of upward revisions interpreted by the market as an increasing inflation trend. As a result, interest rate hike expectations quickly heated up, and U.S. bond yields soared. Gold, as a non-yielding asset, saw its opportunity cost surge, compounded by a stronger dollar, forcing it to sell off: once the PPI data was released last night, gold prices briefly plummeted to $4,324.23, closing down 1.91% at $4,314.82 in New York. What are the negative signals currently pressuring gold prices?

First, high U.S. bond yields. The 10-year yield rose to 4.93%, and the 30-year yield surpassed 5.35%, raising the opportunity cost of holding non-yielding assets.

Second, global interest rate hike expectations are rising. The probability of a Fed rate hike in September has risen to 74%, the European Central Bank has already raised rates by 25 basis points, and the probability of the Bank of Japan raising rates next week is about 97%, with the central interest rates collectively moving upward.

Third, high oil prices. Brent crude oil surpassed $100, briefly touching $105, which not only pushed up inflation expectations but also supported the dollar. It was these three factors that drove gold prices down from $4,434 to $4,314 last night.

However, when looking at the longer time scale, these three negative factors are precisely the strongest endorsements for gold. After 2022, the pricing anchor for gold has shifted from real interest rates to the yield spread between 30-year and 2-year U.S. bonds. The structural rise in long-term bond yields implies more concerns about dollar credit—the sustainability of U.S. fiscal policy and the independence of the Federal Reserve; high yields no longer mean that dollar assets are more attractive, but rather expose the fragility of U.S. finances. Similarly, when central banks are forced to raise rates due to supply-side shocks, the stronger the rate hike expectations, the more they indirectly confirm how stubborn inflation is, while monetary policy is powerless against oil prices and chip production capacity. As for high oil prices themselves, they not only push up inflation expectations but also mean that physical assets are being revalued—former Goldman Sachs commodities research head Jeff Currie believes that global funds are fleeing traditional financial assets, and a super cycle led by hard assets like gold and energy has just begun.

III. The Long-Term Bullish Pricing Anchor for Gold Prices is "U.S. Fiscal Credit"

The market no longer treats gold as a purely interest rate-sensitive asset. The core variable driving gold prices is shifting from the Federal Reserve's policy rates to the sustainability of U.S. fiscal policy. U.S. federal debt has surpassed $40 trillion, with annual interest payments of about $1.1 trillion, exceeding defense spending. The government is trapped in a spiral of "the more debt expands, the higher the interest burden, the more new debt must be issued"; when the Federal Reserve maintains high rates to suppress inflation while the Treasury relies on continuous bond issuance to fill the deficit, the market begins to seriously question whether the credit foundation of the dollar remains solid.

The flow of safe-haven assets is being restructured: U.S. bonds "fall," gold "thrives." After the Treasury expanded the repurchase scale, the 30-year U.S. bond yield only briefly fell, and within 24 hours, it rose again, with investors voting with their feet, expressing distrust in this operation. Meanwhile, global central banks are voting with real gold: by the end of 2025, gold's share in global official reserves is expected to rise to 27%, while U.S. bonds will only be 22%, marking the first time since the mid-1990s that gold has re-emerged as the largest official reserve asset globally; in the second quarter of 2026, global central banks purchased 288.9 tons of gold, a year-on-year increase of 62.4% and a quarter-on-quarter surge of 411.1%. The People's Bank of China has increased its holdings for the 22nd consecutive month, with August's increase setting a new record for this cycle, and the Bank of Korea has restarted gold purchases for the first time in 13 years. The logic of reserve management in various countries is shifting from "yield first" to "safety first."

Thus, gold is experiencing a layered market where "short-term looks at interest rates, medium-term looks at central banks." In the short cycle, gold prices are driven by yields and the dollar, with a PPI exceeding expectations able to drop prices by over $100; in the medium to long cycle, it is supported by the repricing of sovereign credit, a process that is almost unrelated to monthly data. TD Securities assesses that even if the Federal Reserve leans further hawkish, it may only delay the next round of gold price increases rather than trigger a sustained decline; Donghai Securities characterizes this round of decline as a structural correction within a long-term bull market. As Jeff Currie stated, "The core issue remains currency devaluation and financial repression, which is the fundamental reason we hold gold."

IV. Heavy Expectations: Will Tonight's U.S. CPI Exceed Expectations? Three Scenarios and Signals to Watch

The U.S. August CPI, to be released tonight at 20:30 (Beijing time), is the next verification point for this main line and the last key piece of the puzzle before next week's Federal Reserve meeting. It is more important than usual for three reasons: first, the PPI has already brought the issue of "inflation has been rising since July" to the forefront; this time, the market is not only looking at the August reading but also whether previous months have similarly shown upward revisions—data corrections often lead to "catch-up" that can change policy expectations more than the current month's figures; second, energy has a more direct transmission in the CPI than in the PPI; the 24.1% monthly increase in diesel and Brent reaching $105 will directly enter consumer prices through gasoline and transportation components; third, the PPI shows a "overall exceeding expectations, core moderate" split structure, and whether this structure will replicate in the CPI will determine whether the market interprets this round of inflation as a "one-time shock from oil prices" or "a comprehensive price diffusion."

Scenario One: Both overall and core exceed expectations. This is the worst combination for gold. The probability of a September rate hike could soar from 74% to over 90%, and the 10-year U.S. Treasury yield will officially challenge the 5% mark, with gold prices likely testing below $4,300—TD Securities specifically warns that if it effectively falls below $4,300, systemic fund selling pressure may significantly increase, with $4,280 or even $4,260 becoming new battlegrounds. It is important to note that in this scenario, U.S. bonds may not necessarily benefit: the combination of rate hike expectations and fiscal risk premiums may cause longer-term yields to fall even faster.

Scenario Two: Overall exceeds expectations, core remains moderate, replicating the PPI structure. This is likely a higher probability scenario. The market will interpret it as a one-time shock from the supply side, making it difficult for rate hike expectations to rise further, while a retreating dollar gives gold prices room for valuation recovery, likely keeping gold prices oscillating in the $4,300—$4,360 range, with $4,340—$4,360 forming the first resistance zone for rebounds; if the rebound encounters resistance, shorts may re-engage. The direction is unclear, but volatility will be significant.

Scenario Three: Both overall and core are below expectations. In the short term, gold will see a decent rebound, U.S. bond yields will fall, and rate hike pricing will cool down. However, it is crucial to remain clear-headed: a month's CPI cannot change the $40 trillion debt stock, the $1.9 trillion deficit, and the $1.1 trillion annual interest payment scale, nor can it change the Norwegian sovereign fund's reduction plan and the unwinding process of the yen carry trade. Data can relieve pressure on the interest rate side but cannot alleviate pressure on the credit side.

Last night's two contrasts point to the same answer: the market is re-pricing "safety." When repurchases do not restore trust, interest rate hikes cannot suppress oil prices, and inflation cannot buoy gold prices, what is truly being traded is not a single data point, but the failure of an entire old framework. Tonight's U.S. CPI will provide a short-term direction but will not yield a conclusion—the conclusion will only emerge after this round of global reserve asset restructuring is completed.

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