Has the government bond market entered a "new order"? Trump's policy uncertainties push up the long-term U.S. Treasury risk premium
This month, a trend of "selling U.S. Treasuries" has emerged in the global bond market, affecting the fundamentals of U.S. long-term government bonds. The uncertainty of Trump's policies has led bond investors to reassess the safe-haven attributes of U.S. Treasuries, resulting in the risk premium for long-term U.S. Treasuries rising to its highest level since 2014. The market needs to pay attention to trade policies, Trump's threats to the Federal Reserve Chairman, and the possibility of U.S. dollar depreciation. Although U.S. Treasuries still have allocation value relative to European bonds, institutional holding strategies have diverged, with some institutions favoring short-term bonds while others believe that the insurance space for long-term bonds is still expanding
The Zhitong Finance APP learned that the "sell-off of U.S. Treasuries" wave sweeping the global bond market this month is impacting the foundation of the U.S. long-term government bonds, the world's largest deficit financing tool. As the 100-day mark of President Trump's administration approaches, his trade war, tax cuts, and erratic governance style have forced bond investors to reassess the traditional safe-haven attributes of U.S. Treasuries.
In this regard, Jack McIntyre, the head of Brandywine Global Investment Management with $63 billion in assets, stated: "We are entering a new world order." Even if Trump reverses his policies on tariffs, the uncertainty he has created has pushed the long-term U.S. Treasury yield premium (the risk compensation demanded by investors) to its highest level since 2014.
This change is particularly evident in the 30-year U.S. Treasury yield—adjusted for inflation, the real yield reached a peak after the financial crisis this month. Although it has recently retreated, it remains higher than the level on April 2 when Trump announced a comprehensive tariff increase plan.
Currently, bond market traders need to track three major policy variables: first, the combined impact of trade protectionism and tax cuts on fragile economic growth; second, whether Trump will threaten to fire Federal Reserve Chairman Jerome Powell again; and third, whether the White House will shift debt pressure through dollar depreciation.
Although JP Morgan Asset Management still believes that U.S. Treasuries have more allocation value compared to European bonds, and the results of this month's 30-year U.S. Treasury auction show that market demand has not collapsed, institutional holding strategies have shown significant divergence.
Among them, Pacific Investment Management Company (PIMCO) likened the simultaneous weakness of the dollar, U.S. stock market, and U.S. Treasuries this month to trends that may emerge in emerging markets. The company has been buying U.S. Treasuries while simultaneously limiting the volatility of the yield curve, currently favoring bonds with maturities of 5 to 10 years.
In contrast, Vanguard believes that the additional insurance built into long-term bonds has further room for increase, especially if the federal deficit expands and leads to an increase in bond issuance.
Conversely, BlackRock's earlier general decline in various U.S. assets this month has intensified its concerns about the post-pandemic fiscal situation of the government and the sensitivity of U.S. bonds to shifts in investor confidence. BlackRock Investment Research stated in a report that the sell-off in the U.S. market indicates that people are seeking more risk compensation, making this fragile balance a focal point of attention.
The latest financing plan from the U.S. Treasury, set to be announced on Wednesday, will be a key test of market confidence. Wall Street expects the scale of Treasury auctions to remain high over the next three months, but debates within the Republican Party over the payment methods for the tax cut plan may once again raise concerns about fiscal sustainability It is worth noting that for every 1 percentage point increase in yield, the U.S. government needs to pay an additional hundreds of billions of dollars in interest each year—this is no small amount, especially with annual debt servicing costs approaching the trillion-dollar mark.
Regarding the trend of term premium, institutions have formed two major camps: George Catlanbone, head of fixed income at DWS Americas, believes that once trade policies become clearer, the premium will decline, but it will be difficult to return to the low levels seen in the previous decade; meanwhile, Vanguard, which manages $10 trillion in assets, emphasizes that against the backdrop of economic growth expectations being revised down to 1% (the lowest since 2020), fiscal risks will continue to push up the risk pricing of long-term bonds.
This trust crisis in U.S. Treasuries, triggered by policy uncertainty, is forcing the world's largest asset management institutions to recalibrate their investment logic. As the halo of safe-haven assets gradually fades, the U.S. Treasury market may face a fundamental shift in pricing logic
