Why US bonds raise investor concerns?

The US bond market has returned to volatility - its favorite trend of the year. This comes after a brief period of calm following the announcement of a trade truce between the United States and most of its key partners—including China. The recent market shifts are causing concern among observers—but why?

Sound Alarm Bells

Billionaire investor Ray Dalio warned on Thursday, stating that the US bond market faces serious danger due to the country's critical fiscal position, marked by ballooning debt and budget deficits.

Disturbing Moves

This week, 30-year Treasury yields rose above the key psychological threshold of 5%, reaching their highest level since October 2023 before pulling back slightly. Still, they remain well above the average for the past decade.

What Does This Mean?

Rising yields naturally imply falling bond prices. In simple terms, investors are demanding lower prices and higher returns to hold long-term government debt, reflecting growing concerns about the swelling US federal debt.

Investors Inquiring

George Catrambone, Head of Fixed Income and Trading at DWS Group, summed up the sentiment:

“Investors are now asking a very tough question—are we really willing to lend the U.S. government money for 30 years at just 5%?”

Were the Markets Surprised?

Not entirely, but recent developments have created a troubling mix. Credit agency Moody’s downgraded the US credit outlook and expected rising debt have spiked. Additionally, a new tax cut bill, expected to add $3.8 trillion to the national debt over the next decade, is exacerbating the deficit. The current federal debt stands at $36.2 trillion.

Market Response

As Donald Trump pushed lawmakers to support the tax bill, a Treasury auction on Wednesday saw weak demand for 20-year bonds. The fallout wasn't limited to bonds—stock markets also declined, reflecting growing investor anxiety over the US fiscal outlook.

How Serious Is the Risk?

If volatility persists in the bond market, rising yields could slow economic growth by pushing up borrowing costs across sectors—from mortgages to auto loans. It will also accelerate the government’s financial deterioration.

What's the Result?

These shifts are prompting investors to reevaluate their fixed-income allocations. They will also lead to reconsideration of the position of the US Treasuries as a safe investment. Some even argue the US may be approaching a tipping point akin to that of emerging markets.

A Critical Juncture

According to AJ Bell’s Investment Director Russ Mould, nearly half of Treasury debt—about $14 trillion—will mature soon and need to be refinanced at higher interest rates.

The Emerging Market Trap

Mould warns that higher yields lead to higher interest payments, which lead to more debt. That often brings quantitative easing, which fuels inflation and drives rates up further. It’s a vicious cycle—the classic trap for emerging markets. Yet now, the US and Japan are both staring it in the face.

Source: Argaam, CNBC, Bloomberg, Reuters