Decline of Sovereign Bonds as a Safe-Haven Asset and Rotation Toward Gold

Quantitative study of the loss of the protective role of US bonds, modeling the rotation toward gold, Monte Carlo projections toward $5,000, proprietary index STDY-GRB. #QuantitativeFinance.

Summary: Since 2021, the US bond market has experienced upward pressure on yields, with the stock-bond correlation turning positive. Several institutions (Morgan Stanley, Osaic, Sagard) have officially reduced their allocation to fixed income in favor of gold and real assets. This study models this regime change using a two-state HMM, GARCH volatility, and a Merton jump-diffusion process. It derives a bullish breakout index (STDY-GRB) and a median price target of $4,680 over 9 months, with a 62% probability.

https://www.steelldy-indices.com

1. Introduction. The End of 60/40. The nominal yield on the 10-year has risen from 1.5% to 4.6%, while inflation remains at 3.5%, reducing the real yield to around 1.1%. Central banks themselves are reducing their holdings of Treasuries and accumulating gold (+863 tons in 2024, WGC). Quantitative finance allows for formalizing this rotation and projecting prices.

2. Models and Data Two-state HMM on weekly gold returns and the 10-year real yield (DFII10, FRED). GARCH(1,1) for conditional volatility. Merton Jump-Diffusion calibrated on 2015-2026. Monte Carlo with 10,000 trajectories.

3. Results. Probability of breakout above $4,100: 68%. Gold Sharpe ratio: 0.88. Long bond (TLT) Sharpe ratio: -0.44.

4. Steelldy Indices STDY-GRB: Gold Regime Breakout Index. STDY-WIT: War Inflation Tax Index, measuring bond erosion. These indices are available under license at www.steelldy-indices.com.

As the U.S. bond market loses its protective function, Steelldy, a quantitative finance platform, announces the launch of the STDY-GRB (Gold Regime Breakout Index). This composite index measures the probability of a bullish breakout of gold above $4,100, aggregating volatility compression, speculative positioning, ETF flows, and rate expectations. “Institutional investors are massively reducing their fixed-income allocations in favor of gold. Our index quantifies this phenomenon and triggers investment signals,” explains the CEO. The index is backtested, documented, and available under license at www.steelldy-indices.com .