Investors no longer believe that the safest bonds are guaranteed

[UNITED STATES] The US Treasury market, particularly for long-term bonds like the 30-year Treasury, is experiencing a notable decline in investor demand due to growing concerns over America's fiscal outlook. Major investment firms such as Pimco and DoubleLine Capital have significantly reduced their exposure to these long-dated bonds, preferring shorter maturities that offer better risk-reward profiles. This shift has resulted in weaker auctions, higher yields, and volatility in the long end of the Treasury curve, signaling a loss of confidence in the traditional "safe haven" status of US government debt.

Recent auctions for 20-year and 30-year bonds have seen tepid demand, pushing yields to levels not seen since 2020 and 2008, respectively. The market's volatility has become so pronounced that some analysts, including JPMorgan's Bob Michele, suggest the Treasury might need to scale back or cancel future long-bond issuances to stabilize yields. This comes as the US faces ongoing fiscal challenges, including a rising national deficit and the loss of its top-tier credit rating following a downgrade by Moody’s in May.

These developments have broader implications for investors and the financial system. Traditionally, long-term Treasurys have served as reliable portfolio anchors and shock absorbers during market turbulence. However, with yields behaving more like risk assets and investor skepticism mounting, the future stability of this market segment is in question. The upcoming 30-year bond auction on June 12 is being closely watched as a key indicator of market sentiment.

Implications

For Businesses:

Rising long-term yields increase borrowing costs for corporations, particularly those that rely on issuing bonds with longer maturities. This could dampen capital investment and slow economic growth, especially if the volatility persists or worsens. Companies may need to rethink their financing strategies, potentially favoring shorter-term debt or alternative funding sources.

For Consumers:

Higher yields on long-term Treasurys translate into higher interest rates for mortgages and other consumer loans tied to these benchmarks. As Megan Horneman of Verdence Capital Advisors notes, "long-term rates are tied to net interest costs and many loans, especially mortgages." This could make homeownership less affordable and put pressure on household budgets, especially for those with variable-rate debt.

For Public Policy:

The weakening demand for long-term US debt sends a warning to policymakers about the sustainability of current fiscal practices. With the national deficit projected to rise and credit ratings under pressure, there may be increased calls for fiscal discipline and reforms to restore investor confidence. The trend is not limited to the US; governments worldwide are facing similar pressures, indicating a broader shift in the global fixed income landscape.

What We Think

The recent buyers' strike in the long end of the US Treasury market is a clear signal that investors are no longer willing to accept low yields in exchange for fiscal uncertainty. While the US government has long benefited from its status as the world's premier safe haven, that privilege is now being tested by persistent deficits and political gridlock. The fact that long-term Treasurys are trading more like risk assets than risk-free benchmarks is a red flag for both policymakers and investors.

This environment could force the Treasury to rethink its issuance strategy, potentially favoring shorter maturities to meet demand and stabilize the market. However, this is only a temporary fix; the underlying issue remains the government's fiscal trajectory. If policymakers fail to address the root causes of investor anxiety, the cost of borrowing could rise further, with ripple effects throughout the economy.

For investors, the lesson is clear: diversification and vigilance are more important than ever. The traditional playbook of relying on long-term government bonds for stability may need to be rewritten. As the June 12 auction approaches, all eyes will be on whether the market finds its footing—or if this is just the beginning of a more turbulent era for US debt.