The issues of tariffs and fiscal deficits plague the U.S., and U.S. Treasury bonds are expected to experience their first monthly loss of the year

According to the Zhitong Finance APP, U.S. Treasury bonds are set to experience their first monthly loss of the year, due to heightened uncertainty surrounding tariff policies and growing concerns over the rising levels of U.S. government debt. A Bloomberg index tracking bonds fell by more than 1.2% in May. The index declined as all maturing bonds were under pressure. The yield on the U.S. 30-year Treasury bond rose for the third consecutive month, marking the longest continuous decline since 2023; meanwhile, the yields on the U.S. 2-year and 10-year Treasury bonds saw their first monthly increase of the year.

This poor monthly performance reflects the increasingly severe situation facing U.S. Treasury bonds, as the unpredictable policies of the U.S. government shake investor confidence. In May, concerns over the U.S. budget deficit intensified again, as Trump negotiated with Congress on a bill aimed at cutting taxes.

Timothy Graf, head of macro strategy for Europe, the Middle East, and Africa at State Street Global Markets, stated, "I don't think there is a significant imbalance in the bond market right now, but it does need to price in the fiscal deficit factor. We still believe the yield target for the U.S. 10-year Treasury bond should be 5%." On Friday, the yield on the U.S. 10-year Treasury bond stabilized at 4.42%.

It is certain that U.S. Treasury prices rose this week as investors rushed to lock in higher yields, and weaker-than-expected economic data further stimulated demand. If the statistics released later on Friday indicate a decline in both PCE inflation and personal consumption expenditures, this momentum may continue. This would support the Federal Reserve in further interest rate cuts. The money market expects the Federal Reserve to cut rates by about 50 basis points by December.

Signs of an economic recession would particularly benefit short-term bonds, which are more sensitive to Federal Reserve policies. However, the outlook for long-term bonds remains bleak, especially considering the increasing supply of global safe-haven assets.

Citigroup strategist Dirk Willer believes that the term premium on U.S. 10-year Treasury bonds (the extra return investors require for holding long-term bonds instead of a series of shorter-term bonds) will rise by another 50 basis points over the next year due to increasing competition among buyers. Earlier this month, this premium reached its highest level in a decade.

Man Group portfolio manager Henry Neville is monitoring the gap between the actual trading price of the 10-year U.S. Treasury bond and its theoretical fair value. Although U.S. Treasury bonds have long been favored as a traditional safe-haven asset, resulting in yields far below their reasonable levels, this gap is gradually narrowing According to Neville's analysis, since 2020, the ratio has averaged a decline of 150 basis points, marking the lowest spread level in any decade since the 1960s. From May 2023 to July 2024, the gap remained below 100 basis points for 15 consecutive months, the longest period in history below that threshold. He wrote in a report released on Friday, "Sustained readings below 100 are a key signal for me, indicating that the dollar and its related assets may be losing their original appeal."

Mark Dowding, Chief Investment Officer at Royal Bank of Canada BlueBay Asset Management, stated that as demand from international investors gradually decreases, domestic buyers are forced to absorb more supply, making it "easy to imagine" that the yield on the 30-year U.S. Treasury bond could reach 6% or even higher.

He noted that positioning for a steeper yield curve (where long-term bonds underperform short-term bonds) may serve as a better risk-hedging strategy than simply betting on lower yields