From Bonds to Gold: Every Asset Is Trading Its Own Cycle

Tresmark: For the last few weeks we have been talking about cycles. Interestingly, every asset now seems to be trading its own. Pakistan’s bond market is no exception.

Has the bond market become too optimistic?
Pakistan’s macro story has improved materially, but the global macro story hasn’t. Yet in just a few weeks, Treasury bill yields have fallen by as much as 115bps, PIB yields by another 47-70bps, while the 1-year PKRV has declined from almost 12.8% to nearly 11.2%. The bond market is clearly pricing an easier rate cycle ahead. The direction feels right, but the speed perhaps doesn’t.

The SBP Governor recently pointed out that, compared to three years ago, Pakistan has achieved a remarkable degree of stability. Foreign exchange reserves have reached record levels, the current account has swung into surplus, the external funding profile has become more sustainable, remittances remain resilient and lower oil prices have provided further support.

The challenge is that the rest of the world is telling a different story. The Fed continues to lean towards higher-for-longer interest rates, several other central banks have adopted a more hawkish stance, while geopolitical risks remain elevated. Pakistan has undoubtedly improved. The question is whether the bond market has repriced the easing cycle a little too aggressively.

Our base case remains unchanged. We do not expect the SBP to cut rates before September, and even then the timing will depend largely on how the Fed’s outlook and dot plot evolve over the coming months.

Will KSE-100 continue to rise?
After withstanding a genuine global shock, the PSX is once again marching north, this time on much firmer footing. Pakistan’s external position is considerably stronger, leverage has declined, inflation and interest rates have moderated, while sovereign ratings and investor sentiment continue to improve. With liquidity conditions remaining supportive, the market appears well positioned to extend its gains over the medium term.

Here also, the bigger risk lies outside Pakistan. Global technology stocks have entered a far more volatile phase, with the Nasdaq swinging sharply and the VIX rising 20% during June. A meaningful correction in global equities would almost certainly spill over into the PSX. Fortunately, Pakistan’s correlation with global markets remains relatively low. Any external selling pressure is therefore likely to be short-lived, provided domestic fundamentals remain intact.

The Rupee Climb
The Rupee’s strengthening trend remains firmly intact. Even during the peak of the Iran-US conflict, the currency barely wavered. With geopolitical risks easing, oil prices lower and Pakistan’s external position considerably stronger, the Rupee appears well supported for now.

The forward market is beginning to reflect this confidence. Exporters are increasingly shifting their forward bookings to longer tenors, with growing volumes being transacted in the 4-6 month window. While forward premiums have improved, they remain below levels seen three months ago. We expect premiums to gradually firm up further, encouraging exporters to lock in a larger proportion of future export proceeds.

We are also seeing a noticeable pickup in demand for FE-25 financing, which continues to offer an attractive source of lower-cost funding for eligible borrowers.

The Fed’s Dilemma
One disappointing payroll report was enough for markets to scale back expectations of an imminent rate hike. September hike probabilities eased from around 75% to closer to 60%, strengthening precious metals and most G7 currencies in the process.

The bigger story is not whether September is 60% or 75%. The real question has become: What breaks first—inflation or the labour market?

With inflation still hovering around 4% while employment begins to soften, the Fed is being pulled in two opposite directions. Cut rates too early and inflation could reaccelerate. Wait too long and the labour market may weaken more sharply. It is precisely these moments that have historically produced policy mistakes—and market volatility.

How to Trade Gold – two cycles
A number of our clients have been asking whether this is the right time to buy Gold. We like to think of the question a little differently.

There are two Gold cycles happening simultaneously.

The first is the tactical cycle (shorter term), and it remains challenging. A higher-for-longer Fed, a stronger Dollar, elevated real yields, lower oil prices and easing geopolitical tensions all point to a difficult trading environment. These factors could continue to weigh on Gold over the coming months.

The second is the structural cycle (longer term), and it tells a very different story. Around the world, central banks are gradually redefining what constitutes a reserve asset. Gold is increasingly being accumulated as a hedge against geopolitical fragmentation, sanctions risk and reserve diversification rather than simply as an inflation hedge. That trend is structural and is unlikely to reverse simply because the Fed hikes rates another two or three times. If anything, higher rates may merely interrupt the longer-term trend.

So perhaps the better question is not whether to buy Gold, but which cycle are you trying to trade? The Fed is likely to determine where Gold trades over the next 6-12 months. Global central bank reserve behaviour is more likely to determine where it trades over the next 5-10 years.