Treasury Yields Top 5% And Could Rise More. Why And What To Do

Topline

Sell America as tax cuts and rising defense spending add $2.4 trillion to the deficit, raising treasury yields and pushing down the dollar.

Key Facts

Investors are losing interest in America’s long-term government securities — sending the 30 year treasury yield to 5.1%. The most recent force driving up that yield is the House passing a spending bill that could add $2.4 trillion to the national debt, reported the Washington Post.

Why should investors care? The move raises interest rates for consumers — mortgage rates hit 7.08% — and for companies. Gold has resumed its upward climb and could top its record high.

Long-term treasury rates could keep rising. How so? Foreign investors could continue selling the roughly $9 trillion in U.S. debt held overseas, according to the Post. Moreover, $14 trillion in U.S. debt maturing soon will be refinanced — likely at higher rates, noted CNBC.

Higher interest rates and more debt service could push down the value of the dollar — compounding the inflationary effect of Trump’s tariffs for American consumers.

When added to the higher prices caused by tariffs — including Trump’s May 22 threat to tariff at 50% goods exported from the European Union and warning Apple of 25% tariffs on foreign-made iPhones, according to the Wall Street Journal — the odds of a recession loom even higher.

Debt-Spiking Spending Bill Passes The House

The so-called “One Big, Beautiful Bill” would expand and make permanent Trump’s 2017 tax cuts, producing “an economic boom,” Trump administration officials said, according to the Post.

The bill would also add to the national debt and increase how much taxpayer money goes to paying interest on U.S. debt. The bill will add $2.4 trillion to the national debt by 2035, according to the Congressional Budget Office and boost the most recent fiscal year’s unprecedented budget deficit of more than 6% of gross domestic product, noted the Post.

Moreover, the bill will increase interest payments of $881 billion in 2024 — which were more than twice the 2021 figure, noted the CBO. The U.S. now spends more on interest “than it does on national defense or Medicare,” wrote the Post.

One rating agency anticipated the fiscal damage this bill might cause. Last week, Moody’s “stripped the U.S. of its last set of triple-A credit ratings, pointing to growing U.S. debt woes over at least a decade as a reason,” according to the Post.

How Investors Are Responding

Investors expressed a loss of confidence in the U.S.’s fiscal soundness. The result could force the Fed to choose between fighting inflation by raising rates or dampening a recession by cutting them. Meanwhile, analysts see a drop in the dollar and big challenges for investors seeking returns.

Here are some examples:

• House bill deepens U.S. fiscal problems. “Does the U.S. have fiscal problems? Yes it does,” MFS Investment Management head of market insights Benoit Anne told MarketWatch. “Is the U.S. doing anything to resolve those? No, not for now.”
• Fed will struggle with interest rate policy. “When there is a breakdown in the supply-demand picture… that raises interest rates and it puts the Federal Reserve in a bind… between allowing interest rates to rise and hurt the economy, or coming in and printing money… and that produces inflationary pressures,” investor Ray Dalio said in a video featured by Quartz.
• Stagflation shock anticipated. “We’re worried about the economy slowing down … that you’ll get a stagflation shock,” J.P. Morgan Asset Management portfolio manager Priya Misra told the Post.
• Dollar likely to fall. “Given the relentless rush into U.S. dollar assets for the last 20 years, you can see how at the margins some foreign investors are saying, ‘Look, you know what, it’s probably time to take some chips off the dollar table,’ ” Barclays Bank global chairman of research Ajay Rajadhyaksha said, noted the Post.
• Unclear how investors will earn a good return. “How is an investor going to get a good return when the structural growth rate in the economy is softening and, in a good economic environment, debt accumulation by the government is continuing and if anything accelerating?” Unlimited Funds chief executive Bob Elliott asked, according to the Post.

What Investors Could Do

Given the murkiness and volatility accompanying the tariff wars and current fiscal policy, it is difficult to make solid predictions and imagine profitable investment ideas. Nevertheless, the current trajectory described above could lead gold prices to climb, U.S. interest rates to keep rising, and the dollar’s value to decline.

Meanwhile, one expert sees some emerging markets government bonds as strong options for investors looking to diversify away from U.S. treasuries in their fixed income portfolios.

“China’s credit rating is A1 with a stable outlook, and [the U.S.-China 10-year] yield spread makes the former an interesting option despite the uncertain development of the import tariff exchange game,” London-based liquidity solutions provider B2BROKER’s chief dealing officer John Murillo told CNBC.

“Several high-paced developing countries away from the prime rating league — like Indonesia and Malaysia — are en route to becoming particular beneficiaries of the current fixed income portfolio reshuffles. For example, a 10Y Indonesian sovereign bond offers approximately a 7% yield,” he added.

If you do not buy such securities, you could put cash in a money-market fund which would pay a higher yield should the Fed boost interest rates to fight inflation.