Treasury market’s ‘new world order’ brings fear of the long bond
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US President Donald Trump has forced traders to focus on a broad array of issues beyond just the likely path of interest rates.
PHOTO: AFP
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NEW YORK – The “Sell America” trade that gripped markets in April has left a potentially lasting dent in investors’ willingness to hold the US government’s longest-maturity debt, a mainstay of its deficit-financing toolkit.
For bond managers at BlackRock, Brandywine Global Investment Management and Vanguard Group, the problem is that as US President Donald Trump approaches his 100th day in office, he has generated a growing list of unknowns, forcing traders to focus on a broad array of issues beyond just the likely path of interest rates.
To name a few: What do Mr Trump’s trade war, threaten to fire US Federal Reserve chairman Jerome Powell?
The result is a heightened notion of risk that is leading bond buyers to question the traditional haven status of US government debt and require higher yields on longer maturities. By one measure, that added cushion, which traders dub the term premium, is around the highest since 2014.
“We’re in a new world order,” said Mr Jack McIntyre, who with his team oversees US$63 billion (S$82 billion) at Brandywine. “Even if Trump back-pedals on the tariffs, I think uncertainty levels are still going to be elevated. So that means term premium stays elevated.”
Of course, some of the angst around Treasuries could well fade should Mr Trump strike trade deals or continue to signal that he is wary of a full-fledged rout in bonds. But as US Treasury Secretary Scott Bessent prepares to unveil the government’s latest borrowing plans on April 30, he faces the added task of calming investors grappling with a growing host of concerns.
All the uncertainty is leading Mr McIntyre to stay roughly neutral to his benchmark. It is also changing how he sees the long bond behaving in the event of an economic slowdown. In a nutshell, he says yields would remain higher than he would otherwise expect.
No flight
It is not as if investors are fleeing Treasuries wholesale.
JPMorgan Asset Management sees them as a better bet than European government bonds. And April’s 30-year Treasury auction showed that there is appetite for the maturity – at the right price. The result allayed fears of a buyers’ strike, and long-bond yields have eased back from their recent peak.
Sentiment, however, remains fragile. For example, while Mr Trump on April 23 said he had “no intention” of firing Mr Powell, his criticism of the Fed chairman leaves some investors worrying about the central bank’s independence.
Pacific Investment Management, which likened April’s episode of triple-weakening in the dollar, US stocks and US Treasuries to something one might expect in emerging markets, has also been buying US Treasuries. But it has been limiting how far out the yield curve goes. The US$2 trillion bond manager currently favours maturities from five to 10 years.
There are other signs of investor anxiety around the long bond: After adjusting for inflation, 30-year yields in April reached the highest since the financial crisis.
Although they have since receded, they remain higher than when Mr Trump announced his plan for sweeping tariffs on April 2.
For Vanguard, there is scope for the extra insurance being built into longer maturities to swell further, especially if widening federal deficits lead to more bond issuance.
“Term premium is no longer low, but you can’t make a case that it’s historically high,” said Ms Rebecca Venter, senior fixed-income product manager at the roughly US$10 trillion asset manager.
“When you see the fiscal risks in the background, term premium can build over time.”
Vanguard expects US growth below 1 per cent in 2025, which would be the weakest since 2020, and Ms Venter said “that does not bode well for the US budget deficit”.
Next chapter
When the US Treasury releases its latest bond issuance plans this week, Wall Street expects steady auction sizes over the next three months. With Republicans debating how to pay for their tax cut Bill, the fiscal story is the next chapter for the term premium.
One reason a fatter premium matters is that every fraction of a percentage point in extra yield counts for the government at a time when it is paying upwards of US$1 trillion a year to service its debt.
At BlackRock, which oversees almost US$12 trillion, the broad slide across US asset classes earlier in April magnified its concerns around the government’s finances post-pandemic, and how US bonds were vulnerable to shifting investor confidence.
The sell-off in US markets “suggests a desire for more compensation for risk and brought that fragile equilibrium into sharp focus”, BlackRock Investment Institute said in a report.
Mr George Catrambone at DWS Americas sees how the term premium might recede, but only so far, given all the shifting signals out of the White House on tariffs and other policies.
“Once greater clarity is given and agreements are reached, I’d expect term premium to abate,” said the firm’s head of fixed income. “Although not back to the lows of the past decade, as fiscal will be an ever-present concern.” BLOOMBERG
