Bond market jitters rise on 'narrative shift' from positive tariff news to mounting US debt crisis
"The clearest way in which these [deficit and budget reconciliation] uncertainties have manifested themselves is through a steeper US Treasury yield curve," Kelsey Berro, fixed income portfolio manager at JPMorgan Asset Management, told Yahoo Finance on Monday.
Historically, a steeper yield curve, which occurs when long-term interest rates rise faster than short-term ones, signals expectations of stronger growth or higher inflation. But as Berro noted, concerns over rising US debt and long-term borrowing costs are driving the steepening this time around.
While short-term yields like the 2-year and the 5-year have remained relatively stable, reflecting expectations that the Fed will hold interest rates steady, longer-term yields like the 10-year and 30-year have climbed more sharply as investors demand greater compensation for mounting fiscal and policy uncertainties.
This additional compensation investors demand amid such unknowns is known as the term premium.
Its recent rise signals growing concern over the US's role in the global economy and the future direction of both fiscal and monetary policy.
"Ongoing tariff uncertainty means elevated risk of a recession in the US," BNP Paribas' James Egelhof and Guneet Dhingra wrote. "If a recession occurred, we think that concerns about debt sustainability would mean a less robust countercyclical fiscal response than observed in prior business cycles. This would mean a longer and deeper recession, with a larger monetary policy response."
'Nail in the coffin'
The possibility of a US recession, Moody's credit downgrade, and other weakening market signals have prompted some global investors to look elsewhere for more attractive returns.
"There's a little bit more of a nail in the coffin in the sense that investors are looking at other options, and particularly international investors are looking at other options," Ellen Hazen, chief market strategist and portfolio manager at F.L.Putnam Investment Management, told Yahoo Finance on Monday. "So you may see flows out of the US because of these structural reasons."
Kathy Jones, head of fixed income at Charles Schwab, echoed this sentiment, emphasizing that while there's no real substitute globally for US Treasurys, current policies are making it harder to attract foreign buyers.
"By attempting to reduce our trade deficit in goods and services ... we’re effectively limiting capital inflows and shrinking our capital account," she explained, arguing that this conflicts with the urgent need to finance the upcoming spending bill and other activities.
Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at
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