U.S. Treasuries fell, while investors pushed the compensation they demand to hold longer-dated bonds to the highest in more than a decade, as the fallout from U.S. tariff policies overshadows markets.
The 10-year yield was up two basis points to 4.39% on Tuesday after falling the most since January on Monday. The term premium — the extra return investors require to hold longer notes over shorter ones — rose to 71 basis points, a level last seen in September 2014, according to data from the U.S. Federal Reserve Bank of New York referring to last week.
Term premiums have been on the rise as U.S. economic policy becomes harder to predict. An index of such uncertainty neared a record this month after U.S. President Donald Trump announced sweeping tariffs and then backtracked on some. Proposals for tax cuts and a potential need to increase the U.S. government debt limit also contributed to the move.
“There are real fundamental concerns driving yields higher, rather than just investors exiting positions amid market volatility,” Ed Yardeni, the founder of Yardeni Research in New York, wrote in a note. “Perhaps the likelihood of a new debt-ceiling bill that blows out the deficit plus policy uncertainty are raising the term premium on bonds.”
Earlier this month, U.S. Treasury Secretary Scott Bessent indicated that the federal government is at risk of running out of room to make good on all of its payment obligations on time as soon as May or June.
The U.S. has long benefited from abundant demand from foreigners for its debt, who currently hold about 30% in total. That’s helped compress term premiums and reduce borrowing costs, but the trend is flipping into reverse.
“The decline in foreign demand for U.S. Treasuries is a paradigm shift in the demand dynamic and recent events could accelerate this trend,” Societe Generale SA strategists including Subadra Rajappa wrote in a note. That should lead to higher term premium and worsen U.S. deficit projections as net interest outlays climb, they added.
Treasuries fell the most since 2001 last week, as investors questioned the longstanding haven qualities of U.S. government debt and the U.S. dollar. The 10-year yield surged to 4.59% on Friday, its highest since February, before retreating and snapping a five-day losing streak on Monday.
Concerns that tariffs will cause a near-term spike in inflation and curb the U.S. Federal Reserve’s ability to cut interest rates have capped gains at shorter-dated Treasuries. U.S. 10-year breakevens, a gauge of long-term inflation, have fallen since tariffs were announced on April 2, while real yields have soared.
Many market watchers last week suggested that foreign powers including China were offloading their U.S. Treasury holdings in retaliation for Trump’s tariffs, exacerbating the plunge in prices. Bessent sought to play down the selloff, rejecting that speculation and adding his department has a “big toolkit” that can be rolled out if needed.
Still, there are signs that investor confidence toward U.S. assets has been “meaningfully dented,” according to Benoit Anne, senior managing director at MFS Investment Management’s strategy and insights group.
“The UST market may have lost — at least temporarily — some of its legendary defensive characteristics,” he added. “In the face of higher risk aversion, UST do not seem to offer currently the protection that they used to.”
With assistance from James Hirai and Ravil Shirodkar.
Masaki Kondo and Alice Gledhill, Bloomberg News
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