The Federal Reserve is about to cut interest rates, and U.S. Treasuries have taken the lead! Outperforming global sovereign bonds this year

According to Zhitong Finance APP, with the recent surge in global financial markets regarding the "new wave of expectations for the Federal Reserve's interest rate cuts," traders' long-standing bearish views on U.S. Treasury bonds since 2022 have been overturned, and the investment returns on U.S. Treasury bonds have now risen to the top of the core sovereign bond markets.

Statistics from the Bloomberg Index show that, when valued in local currency, the return rate for these U.S. government securities in 2025 is 5.8%, performing the best among the 15 largest bond markets globally. As an important indicator of this strong upward trend, the excess return of U.S. Treasury assets compared to global peers—although still significantly higher than developed markets—has dropped to its lowest point in three years.

Indeed, for international investors priced in U.S. dollars, the persistently weak dollar this year has enhanced the returns of overseas assets relative to U.S. Treasury bonds. However, excluding exchange rate factors and only comparing bond asset performance, sovereign debt assets in other major markets have performed poorly under a series of bad news, including rising fiscal deficits in places like France, Japan's hawkish central bank, and strong performance in emerging market equities leading to continued neglect of the bond market by investors.

Interest Rate Cut Expectations Drive U.S. Treasuries to Rally

"The Federal Reserve is not cutting rates in a strong economy, but rather in a trend of economic weakness, which should form the basis for U.S. Treasuries to outperform the market," said Prashant Newnaha, a senior rates strategist at TD Securities based in Singapore, with 25 years of trading experience in the bond market. "In contrast, from Japan to the UK to France, central banks are turning cautious, and a series of issues from fiscal to political are severely impacting market sentiment towards the debt of these developed countries."

U.S. Treasuries Outperform Global Peers—Investment Returns from the Beginning of 2025 to Present in Local Currency

The strong expectations for the Federal Reserve to cut rates have surpassed various concerns surrounding U.S. Treasury bonds from a few months ago. At that time, many Wall Street analysts turned bearish on these sovereign securities due to worries that the U.S. deficit would continue to exceed 6% of GDP.

Despite the recent strong performance of U.S. Treasuries, analysts have pointed out a series of further negative factors threatening the trajectory of U.S. bonds, particularly including President Donald Trump's aggressive tariff policies undermining the "exceptionalism" of the U.S. economy and assets, as well as his criticisms of Federal Reserve Chairman Jerome Powell being seen as undermining the long-standing independence of the Fed's monetary policy.

Currently, the market's main focus is on the specific pace of the Federal Reserve's policy easing. Swap traders generally expect the Fed to announce three rate cuts of 25 basis points each by the end of this year, with the first expected at the FOMC monetary policy meeting on Wednesday, Eastern Time. The significantly cooling U.S. non-farm payroll data released earlier this month even led traders in the market to briefly anticipate the possibility of a one-time 50 basis point rate cut this week Economists at Barclays have adjusted their forecasts, now expecting the Federal Reserve to cut interest rates three times by 25 basis points each this year, and to make two more cuts in 2026, aligning with the expectations of major Wall Street firms like Goldman Sachs regarding the Fed's rate-cutting path. The latest predictions from Morgan Stanley and Deutsche Bank indicate that the Fed may consecutively cut rates by 25 basis points in the remaining three meetings of this year (September, October, December), a significant upgrade from their previous expectations of rate cuts only in September and December. These adjustments reflect that the market has shifted the Fed's policy focus from combating inflation to addressing potential economic slowdown.

So far this year, the yield on the 10-year U.S. Treasury bond has fallen by about 50 basis points, currently hovering near a five-month low, with the decline in yield indicating an increase in bond prices. In contrast, the yield on French government bonds of the same maturity has risen by nearly 30 basis points, while Japan's has increased by nearly 50 basis points.

According to the spread calculated between the Bloomberg U.S. Treasury Total Return Index and the Non-U.S. Global Sovereign Bond Similar Index, the yield advantage of U.S. Treasuries over other sovereign bonds in major global markets narrowed to 120 basis points on Monday, far below the over 200 basis points seen in January.

"We are seeing concerns about fiscal and supply issues impacting long-end government bond yields from Japan to the UK and France," said Andrew Ticehurst, a strategist at Nomura Securities in Sydney. In contrast, weak U.S. non-farm payroll data and the dovish monetary policy signals from the Fed "seem to be dominating and boosting U.S. Treasuries," he stated in an interview.

International investors beware! A weak dollar is dragging down U.S. Treasuries

Although U.S. Treasuries have outperformed nearly all major financial market competitors this year when measured in local currency value, the story changes significantly when considering foreign exchange fluctuations.

The persistent weakness of the dollar this year has provided additional strong returns for dollar investors who have shifted some funds from dollar-denominated assets to investments in non-dollar-denominated assets. Based on this measure (using dollar exchange rate benchmarks), Italian government bonds have been the best-performing major bond market in 2025, returning 16%, followed by Spain at 15%.

The weakening dollar has caused U.S. Treasuries to lag behind their peers in dollar-denominated returns—uniformly measured dollar returns year-to-date.

BlackRock, the largest asset management giant in the U.S., is one of the large investment institutions optimistic about sovereign bond investment opportunities outside of U.S. Treasuries. "From a relative value perspective, we currently prefer European and even UK investment-grade bonds over U.S. Treasury assets." "The company's co-head of EMEA fundamental fixed income based in London, Simon Blundell, stated. 'In our global mandates and funds, we prefer to hedge the exposure to European assets back to a weak dollar.'

However, traders in the market still expect that the clear outlook for a new round of Federal Reserve easing monetary policy may lead to further increases in U.S. Treasury prices, thereby helping some domestic institutional investors and those holding large dollar reserves for the long term to overcome the adverse effects of a weakening dollar.

Benoit Anne, Senior Managing Director at MFS Investment Management in London, wrote in a report last week: 'There is almost no doubt that the Federal Reserve will implement a rate cut this month. The weak U.S. non-farm payroll data has at least temporarily supported the core rationale for going long on U.S. Treasuries.'