- Despite bigger deficits, political uncertainty, and geopolitical shocks, U.S. Treasurys are still attracting enough demand to avoid a bond-vigilante rout so far.
- Rising Japanese yields after the BoJ’s shift are encouraging capital repatriation and gradually weakening a key source of foreign Treasury buying.
- Heavy debt issuance, higher term premia, and tariff-linked inflation risks could push long yields up further and test confidence in Fed independence.
- Markets are watching for credible deficit control, while investors increasingly favor shorter duration, inflation protection, and diversification beyond long bonds.
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The bond market in the United States is facing its sternest test in recent memory. Despite decades of broad confidence in U.S. government debt—anchored in its status as the global reserve instrument—recent shifts suggest that even America’s Treasurys may not be immune from vigilante-style pressure. A series of developments—from rising deficits and controversial fiscal policy to foreign pressure and international bond-market contagion—have combined to challenge prevailing assumptions, though so far without a wholesale exodus from U.S. bonds.
Drivers of pressure:
First, fiscal expansion under the “Big Beautiful Bill,” incorporating large tax cuts and heightened federal spending—particularly on military and entitlement programs—has raised long-term deficit projections materially, toward 6-7% of GDP. Markets have reacted with rising long-term interest rates, especially on 10- and 30-year Treasurys. The credit rating downgrade by Moody’s further illuminated concerns about debt trajectories driving borrowing costs.
Second, external spillovers—most notably from Japan’s abrupt policy pivot away from yield-curve control—have elevated yields on Japanese government bonds, which in turn have encouraged repatriation of capital from U.S. Treasurys and narrowed the yield differential that had made U.S. fixed income especially attractive.
Third, geopolitical risks—such as Donald Trump’s renewed threats relating to Greenland and tariff proposals—have introduced specific risk premiums. These are particularly felt for European investors holding Treasurys, amid fears of retaliation or instability affecting traditional alliances.
What’s holding U.S. Treasurys together—for now:
Despite these challenges, there remain several stabilizing forces. The sheer size, liquidity, and deep market infrastructure of U.S. Treasurys continue to make them the fallback of global capital in times of uncertainty. Data show that foreign appetite for U.S. debt has not collapsed—indeed, some reports suggest large net inflows over recent months.
Moreover, inflation, while elevated particularly in shelter and trade-affected sectors, has begun to moderate (though still exceeding the Fed’s target). This has allowed bond yields to stabilize after episodes of sharp repricing. Fed signaling of eventual rate relief (mid-2026) has helped anchor beliefs that policy tightening has largely run its course in the short term.
Strategic implications for investors & policymakers:
For investors, exposure to long-dated Treasurys becomes more hazardous: yield volatility, inflation risk, and term premiums suggest that shortening duration and increasing holdings of inflation-indexed securities (e.g., TIPS) are prudent. Credit markets, high yield, higher margin spreads, and alternative assets may offer better risk-adjusted returns in this environment.
For policymakers, credibility matters. A roadmap for stabilizing or reducing deficits will be closely monitored—persistent expansion without offsets risks triggering a loss of market confidence. Fiscal dominance (where debt obligations force central bank constraints) is a core vulnerability: if markets believe the Fed is being pressured to accommodate deficits, inflation expectations may become unanchored.
Open questions include: how far yield curves can steepen before affecting growth, how international holders (Japan and Europe) reallocate their bond portfolios, and whether trade/geopolitical shocks push investors further from safe havens like U.S. debt.
Supporting Notes
- On January 20, 2026, U.S. 10-year Treasury yields rose to ~4.29%—a five-month high—and 30-year yields jumped to approximately 4.92%, marking their largest single-day increase since July 2025, amid geopolitical tension related to Greenland.
- Denmark’s AkademikerPension announced plans to exit its U.S. bond holdings, citing U.S. fiscal policy and geopolitical uncertainty; the U.S. Treasury Secretary responded by calling Denmark “irrelevant” as a market mover.
- Foreign demand for U.S. Treasurys remains broadly stable: data showed sustained inflows (over $300B in recent months) and continued interest from key foreign holders—even amid concerns about tariff policies.
- Japan’s long-term government bond yields have surged following BoJ’s policy normalization, triggering capital moves back to domestic assets and implying reduced foreign purchasing of Treasurys.
- The U.S. deficit is projected to reach 6-7% of GDP under new fiscal legislation (e.g., the “Big Beautiful Bill”), with tax cuts and heightened spending largely unfunded, leading markets to reflect higher term premiums.
- The net cost of servicing federal debt as a share of government revenues rose to ~12.7% in 2025 and is projected to increase under less favorable fiscal and yield scenarios.
- Core inflation has remained elevated (around 2.8% year-over-year in September 2025), well above target, reinforcing fears that rate cuts may be delayed and that fiscal policies may amplify inflationary pressures.