by Lawrence Gillum, Chief Fixed Income Strategist, LPL Research
It has seemingly been a one-way move higher in longer-term interest rates in May, with the 30-year U.S. Treasury yield above 5% again and higher by 0.36% this month alone. Additionally, the 10-year U.S. Treasury yield breached 4.5%, up 0.35% in May alone. The reasons for the sell-off are many: elevated inflation expectations, a Federal Reserve (Fed) on hold, foreign buyer boycotts, the recent Moody’s downgrade, and the potential for more debt and deficit spending (which are all likely exacerbated by an illiquid Treasury market).
But it hasn’t been just a U.S. problem, long-term interest rates have surged globally, with a significant sell-off in April and May pushing, among others, U.K. Gilts, Japanese Government Bonds (JGBs), and German Bund yields to multi-year highs as well. The synchronized yield spike reflects fears of debt saturation, fiscal dominance, and trade war-induced inflation. Trump’s tariffs, particularly on China, have raised inflation expectations, potentially constraining central banks. A brief yield dip followed Trump’s 90-day tariff pause (excluding China) in April, but underwhelming government bond auctions persist.
And with the recent global sell-off in duration, longer-term interest rates are higher in many non-U.S. markets, which may mean foreign investors (who make up 30% of U.S. Treasury ownership) may not be as willing to invest in U.S. Treasury securities. Non-U.S. investors, particularly from Europe and Japan, are increasingly disincentivized to own U.S. Treasuries on a currency-hedged basis due to rising home-market yields and high hedging costs. The yield differential between U.S. 10-year Treasuries (4.5%) and 10-year German Bunds (2.56%) or 10-year JGBs (1.50%) has narrowed as global yields have surged recently. For Eurozone investors, hedging via currency swaps involves costs tied to interest rate differentials, which reduce the effective Treasury yield below that of bunds or even U.K. Gilts. Japanese investors face similar challenges, with yen volatility and JGB yields at 1.5% making domestic bonds more competitive after hedging costs.
10-Year U.S. Treasury Yields Are Not Attractive to Foreign Investors
Difference in 10-year foreign government yields vs. 10-year U.S. Treasury yield hedged to foreign currency
Source: LPL Research, Bloomberg 05/23/25
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.
The Trump administration has repeatedly noted that they want borrowing costs (yields) lower to help refinance debt. But with the on-again, off-again tariffs and now the prospects of more deficit spending through the Republicans’ “big, beautiful bill,” rate cut expectations have fallen dramatically. The 10-year Treasury yield is highly correlated (98%) with the expected trough in the fed funds rate, so as rate cuts get priced out, Treasury yields have moved higher. Moreover, the 10-year Treasury term premium (the additional compensation required to own longer-maturity Treasury yields) has increased as well, suggesting longer-term rates are still too low to entice demand. The administration is looking at ways to decrease the regulatory burden on banks owning Treasury securities, which, if enacted, could help reduce longer-term yields. But unless/until the economic data shows a material weakening, particularly in the labor market, longer-term yields could remain elevated or even drift higher. And if the global bond market sell-off persists, an increasing share of Treasury ownership will have to come solely from U.S. investors. We remain neutral duration relative to benchmarks and think the best risk-reward in the Treasury market remains in the 2–5-year parts of the Treasury curve.
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