Interest rate breaks 5%, gold crashes? Changjiang Securities wants to prove: interest rate hikes may not be bearish for gold.

"The market intuition that 'once interest rates break 5%, gold will crash' may be a historical bias that needs to be tested. A recent research report from Changjiang Securities points out that this judgment is rooted in investment experience from the past 20 years of low interest rates. Under the current historically unprecedented combination of high debt and high interest rates, rising rates may not necessarily be bearish for gold; instead, they could systematically strengthen gold's allocation value by persistently eroding the fiscal credibility of the US dollar. The pricing logic of gold is shifting from 'opportunity cost' to 'credit substitution.'

In terms of data, U.S. federal net interest payments in 2025 have reached $970.1 billion, surpassing the defense budget of approximately $900 billion, accounting for 3.2% of GDP and 18.5% of fiscal revenue—both are historical highs since World War II. Changjiang Securities analysts Wang Hetao and Ye Ruzhen noted in the report that this level not only exceeds the historical peak at the end of the Cold War in 1991, but also has endogenous conditions for further deterioration in terms of debt structure and interest rate trajectory, signaling that the U.S. has entered a critical threshold for sovereign credit risk exposure.

Regarding market impact, the study cites nearly 60 years of data to confirm that the pricing logic has shifted: When the 10-year U.S. Treasury yield is below 4.5%, rising rates do indeed have a negative impact on gold prices; but once rates break through and stabilize in a high range, the relationship between the two fundamentally reverses. Between 2022 and 2025, U.S. Treasury yields rose from below 2% to the 5% range, while gold prices accumulated a gain of over 100% during the same period, ultimately hitting a record high of $3,300—the traditional framework of 'rate hikes are bearish for gold' has completely failed in this cycle.

Changjiang Securities maintains a mid-term bullish outlook on gold, recommending increasing allocation on pullbacks, while also noting that short-term pressure from interest rate expectations volatility on gold prices is a temporary disturbance, with the mid-term logic continuing to strengthen.

Inertia Misconception: The Applicability Boundary of the 'Real Interest Rate Framework'

The narrative that 'rising rates are bearish for gold' is not unfounded; it has a solid historical basis, but the time window for that basis is too narrow.

During the low-interest-rate era from 2008 to 2021, the 10-year yield fluctuated mostly between 0.5% and 3.5%, and 'real interest rates' were the core variable for gold pricing. During the Taper Tantrum in 2013, yields rose from 1.6% to 3.0%, and gold prices fell from $1,700 to $1,200. In the 2018 rate hike cycle, yields rose from 2.3% to 3.2%, and gold prices fell from $1,350 to $1,160. In a low-interest-rate environment, the opportunity cost of holding non-yielding gold is clear—a 3% risk-free return on U.S. Treasuries presents a clear substitution advantage over 0% gold returns.

However, since 2022, this logic has been systematically overturned. The Fed launched aggressive rate hikes, with the 10-year yield climbing from below 2% to a peak of 5.02% in October 2023. Under the traditional framework, this should have been the darkest period for gold. The actual result was the opposite: gold prices rebounded from a low of $1,620 in November 2022 and eventually hit a record high of $3,300 in 2025.

Changjiang Securities extended the observation window to nearly 60 years, providing more complete evidence.

During the Volcker era from the 1970s to the early 1980s, yields were in a high range of 8% to 15%, and the 5-year rolling correlation showed that gold and interest rates were mainly positively correlated, reflecting the erosion of fiscal sustainability by high rates. From the mid-1980s to 2021, rates entered a long-term downtrend, and the correlation systematically turned negative. Since 2022, as yields have again broken above 4% and stabilized at high levels, the correlation has turned positive again. Based on this, the study concludes that the 4% to 5% yield range is the critical threshold for the switch between the two pricing logics: below this, opportunity cost dominates; above this, the credit backlash logic takes over.

Three-Stage Debt Cycle: The Unprecedented Combination of High Debt and High Interest Rates

To understand the underlying logic of the changing relationship between gold and interest rates in different yield ranges, debt is the core clue. Changjiang Securities divides the U.S. debt cycle since World War II into three stages.

Stage One (1950 to 1980): High interest rates + low debt. Rates were high but the debt scale was relatively manageable, with interest payments as a share of GDP remaining in the reasonable range of 2% to 3%. The meaning of high rates was monetary tightening, not a signal of debt crisis.

Stage Two (1990 to 2021): High debt + low interest rates. The debt scale continued to rise, but rates were on a long-term downtrend. Low rates partially offset the interest burden of debt expansion, and interest payments/GDP was once suppressed near 1.5%. This stage established the market's investment inertia of the 'real interest rate framework.'

The current Stage Three (2022 to present): High debt + high interest rates. The debt scale has exceeded 100% of GDP, and the effective interest rate has rapidly risen above 4.5% since 2022. For the first time, high debt and high rates are forming a positive resonance.

Changjiang Securities points out: This is an unprecedented configuration in history—pressure from both dimensions simultaneously, amplifying the interest payment burden exponentially. In this configuration, each unit increase in interest rates strengthens credit pressure rather than simply reflecting monetary policy stance. The transmission chain of rising rates changes accordingly: rising rates → soaring interest payments → widening fiscal deficits → accelerating debt stock growth → rating agencies downgrade credit ratings → weakening demand for U.S. Treasury auctions → foreign investors reducing holdings → shaking the foundation of dollar credit → gold upgrading from a safe-haven asset to a credit substitute.

The Critical Zone for Credit Risk: The Historical Coordinate of 3.2%

Through a systematic review of historical data from major developed economies since World War II, Changjiang Securities identifies a key threshold for interest payments as a share of GDP: When it exceeds 2.5%, the market begins to question fiscal sustainability; at 3.0%, rating agencies typically initiate downgrades or negative outlooks; above 3.5%, it is often accompanied by significant fiscal tightening or monetary credit restructuring.

Comparing historical inflection points, the position in 2025 is highly unique. At the end of WWII in 1945, the debt/GDP ratio was 104%, similar to today, but the Fed used yield curve control to suppress long-term rates near 1.3%, keeping interest payments/GDP at only 1.36%—a maneuver the Fed cannot replicate today.

At the Volcker peak in 1981, the effective rate was as high as 7.2%, but public debt was only 25% of GDP. After inflation was resolved, rates naturally fell, and the interest burden quickly eased. In 1991, interest payments/GDP reached 3.16%, the same as in 2025, but debt was only 44% of GDP. The 'peace dividend' from the end of the Cold War pushed interest payments/revenue from 18% to below 10% over the following decade.

In 2025, the combination is entirely different: an effective rate of 3.2% (moderate) combined with a debt/GDP ratio of about 120% (massive), resulting in interest payments/GDP of 3.15% and interest payments/revenue of 18.53%—both the highest since WWII. More critically, this situation lacks the escape routes that were effective historically: no yield curve control to suppress rates, no super-high economic growth to rapidly reduce the debt/GDP ratio, and no 'peace dividend' to create fiscal consolidation space. The automatic growth of Social Security and Medicare benefit spending makes deficit reduction nearly impossible, and the debt stock is almost certain not to decline.

International comparisons further highlight the unique vulnerability of the U.S. In static terms, Italy's interest payments/GDP (3.8%) is higher than the U.S. (3.15%), meaning the U.S. is not the country with the highest interest burden.

But Changjiang Securities points out: The U.S. exhibits unique risks across four dimensions: Growth dimension—U.S. interest payments/GDP nearly doubled in five years, much faster than other comparable economies; Debt structure dimension—about 24% is held by foreign investors, with China having structurally sold about $400 billion in U.S. Treasuries over the past five years, a decline of 36.6% with no sign of reversal; Monetary policy space dimension—the Fed is trapped in a 'fiscal dominance' trap where 'the higher the rates, the worse the fiscal situation; the worse the fiscal situation, the more reluctant to raise rates'; Credit rating dimension—S&P and Fitch have already downgraded, and Moody's placed its outlook on negative in 2024, putting the U.S. at risk of completely losing all top-tier credit ratings for the first time in history.

Every 50bp Rate Hike: The Fiscal Bill Mounts Quickly

With a public debt stock of $30.3 trillion in 2025, every 50 basis point increase in the effective rate adds about $150 billion in annualized interest payments. Changjiang Securities' sensitivity analysis shows that if the effective rate rises from the current 3.2% to 4.3% (only 100 basis points), interest payments would expand from $970.1 billion to about $1.3 trillion, an increase equivalent to the annual GDP of a medium-sized economy. If the effective rate approaches the average of the 1990s at 6%, interest payments would approach $1.82 trillion, an increase of about 87% from the current level.

This is only a static calculation. Dynamically, the rollover effect of existing debt exerts endogenous upward pressure on the effective rate. In 2025, the rate on new issuance is already at 4.5% to 5%, while about 30% of the debt stock matures each year and needs to be refinanced. Low-coupon existing bonds are gradually replaced by higher-coupon new bonds, continuously pushing up the weighted average interest rate. Changjiang Securities estimates that assuming new issuance rates remain at 4.5%, even if the Fed does not raise rates, the effective rate would automatically rise to about 4.1% within three years, pushing interest payments toward $1.3 trillion.

Looking at the 2025 federal budget structure, net interest payments already account for 13.8% of total spending, surpassing defense spending (about 12.9%) and second only to mandatory spending (Social Security, Medicare, etc., accounting for about 58.5%). Both mandatory spending and interest payments are 'rigid expenditures,' and together they have accounted for over 70% of the budget, leaving policymakers with rapidly shrinking fiscal room for maneuver.

Paradigm Shift: Mid-Term Bullish, Increase Allocation on Pullbacks

In summary, Changjiang Securities believes that the current market's linear extrapolation of experiences from the low-rate era is essentially a selective neglect of the full historical cycle.

Regarding short-term pressures, the institution is clear: Negative impacts on gold prices from fluctuations in interest rate expectations and uncertainty about the Fed's policy path are temporary and do not change the mid-term direction. The consecutive rating downgrades from 2023 to 2025, foreign central banks' reduction of U.S. Treasury holdings since 2024, and the 8.8% depreciation of the dollar's trade-weighted exchange rate since early 2025 are all empirical signals of the transmission chain of credit loosening, not isolated events.

Regarding the mid-term logic, Changjiang Securities writes in the report: 'The debt landscape is the cumulative result of decades of fiscal expansion, welfare rigidity, monetary easing, and geopolitical spending, with strong path dependence and irreversibility, leaving very narrow fiscal consolidation policy space. The longer high interest rates persist, the heavier the cost of rolling over existing debt, the faster the interest payments/GDP ratio climbs, the more significant the sovereign credit loosening, and the more prominent gold's strategic allocation value as a hedge against credit depreciation.'

Risk Disclosure and Disclaimer

        Market risk exists, and investment requires caution. This article does not constitute personal investment advice, nor does it consider the specific investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment based on this is at your own risk.