Written by Lawrence Gillum | Chief Fixed Income Strategist
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.
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.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor's holdings.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
For Public Use – Tracking: #745390
Lawrence Gillum, CFA, guides the fixed income view for LPL Financial Research and has over 20 years of investing experience.
Written by Lawrence Gillum | Chief Fixed Income Strategist
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.
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.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor's holdings.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
For Public Use – Tracking: #745390
Lawrence Gillum, CFA, guides the fixed income view for LPL Financial Research and has over 20 years of investing experience.
Securities and advisory services are offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
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