US Treasuries Post First Monthly Loss of 2025 on Deficit Woes

US Treasuries are on track for their first monthly loss this year, with a Bloomberg index tracking the bonds down over 1.2% in May, driven by renewed tariff uncertainty and growing concerns about rising government debt. The 30-year yield rose for a third consecutive month, while yields on two- and 10-year tenors posted their first monthly increases of the year, reflecting investor anxiety over the US budget deficit and unpredictable policies. Citigroup strategists anticipate the term premium in 10-year US Treasuries rising further, potentially another 50 basis points in the next year, as competition for buyers intensifies amid increasing global supply of safe assets.

Analysis

US Treasuries experienced their first monthly loss of 2024 in May, with a Bloomberg bond index declining by over 1.2%, primarily driven by renewed tariff uncertainties and escalating concerns regarding the substantial US government debt. This pressure was evident across maturities, as the 30-year yield marked its third consecutive monthly rise, its longest losing streak since 2023, while 2-year and 10-year yields recorded their first monthly increases this year. For instance, two-year yields, despite a minor dip on the month's final trading day to 3.9%, remained elevated from April's 3.6% close. Market participants, such as Timothy Graf of State Street Markets, suggest the necessity of pricing in the deficit, with a potential target of 5% for 10-year notes. Further compounding the challenging outlook for longer-term debt, Citigroup strategists anticipate the 10-year US Treasury term premium, already at a decade high, could ascend by an additional 50 basis points over the next year due to intensifying competition for buyers amidst a growing global supply of safe assets. While recent economic data indicating falling imports, slowed consumer spending, and tame inflation, alongside money markets pricing in approximately 50 basis points of Federal Reserve rate cuts by December, might offer support for shorter-dated maturities more sensitive to Fed policy, the broader environment for long bonds remains difficult, underscored by unpredictable US administrative policies and persistent budget deficit worries.

Key Decisions for Investors

• Investors should exercise caution with long-duration Treasury exposures, potentially considering an underweight position, given the confluence of rising yields, deficit concerns, an increasing term premium, and growing global supply.
• Closely monitor developments in US fiscal policy, particularly regarding the budget deficit and tax discussions, as well as any shifts in trade rhetoric and tariff implementations, as these are significant drivers of current market volatility.
• Evaluate potential relative opportunities in shorter-dated Treasuries, which may benefit from anticipated Federal Reserve rate reductions and signs of economic deceleration, offering a more defensive posture compared to longer maturities.
• Adjust return expectations for US Treasuries to account for expert forecasts, such as the 10-year yield potentially reaching 5% and a structurally higher term premium, which could signify a paradigm shift in bond market pricing.