U.S. bond yields have soared; how should investors respond?

Since May of this year, the U.S. Treasury market has experienced unusual volatility, with U.S. Treasury rates soaring dramatically! The 10-year U.S. Treasury rate has broken 4.5%, and the 30-year U.S. Treasury yield has surpassed 5%, reaching a new high since November 2023. Events disturbing U.S. Treasury rates include the "One Big Beautiful Bill" passed by the U.S. House of Representatives, Moody's downgrade of the U.S. sovereign credit rating, and lackluster demand at 20-year Treasury auctions, creating a series of chain reactions that have stimulated a decline in demand for U.S. Treasuries, subsequently pushing rates higher.

The underlying reason lies in the issues of U.S. inflation and fiscal deficits, leading to increasing market concerns about the sustainability of U.S. finances. So, what does the surge in U.S. Treasury rates mean for ordinary investors? How should one respond? This article will provide a detailed analysis.

Basic knowledge about U.S. Treasuries.

U.S. Treasuries are a means for the federal government to raise funds to cover its fiscal deficits, promising to pay interest at agreed rates and repay principal at maturity.

Its core characteristics are:

Classification of US Bonds

From the product classification perspective, US Bonds include government bonds (i.e., national debt), corporate bonds, municipal bonds, and mortgage-backed securities.

Among these, national debt is the largest variety in the US bond market. As part of the US sovereign debt, it is generally considered to have almost no risk due to support from the US government. Therefore, the interest rate on US Treasury bonds is viewed as the risk-free rate and is favored by large governments and individual investors worldwide.

From an investor's perspective, the yield on U.S. Treasury bonds represents the annualized return on holding Bonds to maturity. As for the maturity date, it is the period the government promises to repay, ranging from 1 month to 30 years. Based on this duration, Treasury bonds can be divided into three major categories: short-term Treasury Bills with maturities of 1 year or less, medium-term Treasury Notes with maturities of 2 to 10 years, and long-term Treasury Bonds with maturities of over 10 years.

US Treasury yields

The yield of US government bonds reflects, on one hand, the cost of financing for the US federal government, and on the other hand, the investors' expectations for economic prospects, but ultimately reflects the market's demand and pricing for US Treasuries. When demand for bonds increases, bond prices rise and yields fall, and vice versa.

Referring to the bond price and yield formula, the current yield of a bond = annual coupon payment / current market price.

Clearly, bond prices and yields are inversely related, and understanding this relationship is crucial for successful bond investing. When we see bond yields rising, it indicates that demand for Treasuries is falling, possibly because investors prefer higher-risk, higher-return investments at that time; while a decline in yields indicates the opposite situation.

The significance of US Treasury yields varies greatly depending on the term. Among them, the yield on 10-year US government bonds is often regarded as the benchmark for the 'risk-free rate' and is frequently used as a benchmark for other interest rates, such as mortgage rates and corporate debt rates. Therefore, this yield is seen as an indicator of investors' confidence in the market.

How U.S. Treasury yields change

The inverse relationship between price and yield is the core rule of the bond market. The transmission path of interest rate changes is roughly: Fed policy → market expectations → supply and demand changes → price adjustments. This can be understood through the following factors:

The Federal Reserve's (Fed) policy rates have a significant impact

Fed raises rates → short-term rates (such as the 2-year U.S. Treasury yield) rise → new bond yields are higher → old bond prices fall

Fed cuts rates → market interest rates fall → old bonds (with high coupons) become sought after → prices increase

Market expectations influence the direction of yields

Rising inflation expectations → Investors demand higher yield compensation → Bond prices fall.

Concerns about economic recession → Funds flow into safe havens (Buy bonds) → Prices rise, yields fall.

Supply and demand play a key role.

The government issues a large amount of bonds (increased supply) → The market needs higher yields to attract buyers → Prices fall.

Foreign central banks/Institutions heavily buy bonds (increased demand) → Prices rise, yields fall.

Futubull Education: If you need to understand more detailed knowledge about U.S. bonds, please click.Essential class on U.S. bonds.to engage in in-depth learning.

Why have U.S. bond yields soared?

In May of this year, U.S. bond rates experienced multiple abnormal increases, so let's briefly review a series of events that occurred at that time:

May 13: The House Committee on Ways and Means released the text of the tax cut bill, leading to an increase in U.S. bond yields, a drop in the dollar, and market concerns about the expansion of the U.S. deficit.

May 17: Moody's downgraded the U.S. sovereign credit rating, and the U.S. lost its last AAA rating.

May 18: The U.S. House Budget Committee voted to approve the tax cut bill, causing U.S. bond yields to rise.

May 20: The 20-year Japanese bond auction was lukewarm, and U.S. bond yields rose again.

May 22: The 20-year U.S. bond auction was lukewarm, and U.S. bond yields continued to rise.

What is the impact of the tax cut bill?

This tax reduction plan, named 'One Big Beautiful Bill', primarily extends the existing TCJA individual and corporate tax cuts, accounting for about 80%, while the newly added tax cuts make up about 20%, mainly including: tax exemption on overtime wages, tax exemption on tip income, tax exemption on car loan interest, and a pilot program for MAGA accounts, among many other tax relief items. Overall, the aim is to raise the tax base threshold for residents and increase the tax exemption limits.

If the Senate votes in June, the tax reduction bill is about to be implemented.

The impact of the tax reduction plan is also very obvious. The benefit is that the tax cuts may increase household income and stimulate economic growth. The downside is that it leads to a decrease in government revenue, which may result in a larger government deficit. In fact, the bill has intensified market concerns about the financial health of the U.S. and the sustainability of its debt, driving U.S. Treasury rates higher, which means investors are demanding higher returns to compensate for the risks of buying government bonds.

What is the impact of losing the AAA sovereign credit rating?

When it rains, it pours; on one side is the advancement of the tax reduction plan, while on the other side, Moody's has downgraded the U.S. sovereign credit rating from Aaa to Aa1, citing the potential deterioration of U.S. fiscal health.

Moody's believes that the U.S. government has failed to take effective measures to control deficit and debt growth, predicting that by 2035, the U.S. government deficit will reach 9% of GDP, and the debt burden will rise to 134% of GDP, which may compel the U.S. government to adopt more radical policies in the future.

In fact, Moody's is the last of the three major rating agencies to downgrade the U.S. Previously, S&P in 2011 and Fitch in 2023 had already stripped the U.S. of its AAA rating. Moody's downgrade also indicates a certain degree of increased default risk on U.S. bonds, requiring investors to seek higher interest compensation when purchasing U.S. bonds, or some conservative funds may reduce their holdings in U.S. bonds, leading to a drop in bond prices and ultimately stimulating an increase in U.S. bond yields.

However, compared to the tax reduction bill, the impact of losing the AAA rating is smaller, especially since a lot of the negative effects have already been priced in when S&P and Fitch downgraded the rating.

Here is an additional knowledge point: Among the bond credit rating standards of the three major rating Institutions, investment-grade bonds (such as AAA to BBB-) have low default risk, making them suitable for conservative investors; junk bonds (such as BB+ and below) may have interest rates exceeding 6%, but they carry high default risks, like some CSI Enterprise bonds.

Investment response strategy

Is there an allocation opportunity for U.S. Treasuries?

As mentioned above, the 10-year U.S. Treasury yield usually reflects medium to long-term economic growth and inflation expectations. In other words, an increase in the 10-year U.S. Treasury yield typically indicates an improvement in economic expectations or rising inflation.

So, when the 10-year U.S. Treasury yield exceeds 4.6% and bond prices decrease, is this a buying opportunity?

To answer first, this opportunity is not very obvious. In the current situation, the rise in yield is more about concerns regarding U.S. fiscal policy.

For example, on May 22, 2025, the auction demand for 20-year Treasuries was weak, with the final bid yield at 5.047%, approximately 1.2 basis points higher than the pre-issuance rate, creating the largest tail spread since last December. This clearly indicates that investors are demanding higher risk compensation to cope with the potential future expansion of fiscal deficits and debt risks. At this time, picking up bonds might not be sufficient for safety.

The impact on other assets is complex.

Generally, when the yield on U.S. Treasury bonds rises significantly, other types of assets will also show a chain reaction in the short term.

In theory, when U.S. Treasury yields rise, it is often accompanied by a strengthening USD, while assets such as Stocks, Bitcoin, and Gold may experience a downward trend due to decreased risk appetite and factors like rising interest rates impacting costs.

However, the actual situation is much more complex than the theory, and the real performance of various Assets still depends on the driving factors of rising yields.

For example, when U.S. Treasury rates soared in May this year, the trends we observed were very different.

On May 27, when the yield on the 10-year U.S. Treasury approached 4.6%, there was a divergence between the USD index and Treasury yields, and Gold Futures prices increased. The core reason lies in the market's doubts about the sustainability of U.S. fiscal policies, especially after Moody's downgraded the U.S. sovereign rating. The dollar faced pressure, and investors shifted towards assets with better preservation functions, highlighting Gold's hedging properties, and even Bitcoin showed a very strong performance.

In summary, even if the 10-year U.S. Treasury yield breaks 5%, it does not necessarily signal that it is time to buy U.S. Treasuries, but rather may reflect market concerns about U.S. fiscal policy. When considering whether to buy U.S. Treasuries, current macroeconomic conditions, policy direction, and personal risk tolerance should be comprehensively assessed, while keeping a close eye on the realization of other types of assets to timely adjust the investment portfolio.

Futubull Education: For more insights on stock and bond market analysis, please click here.Is the attractiveness of the bond market rising? What is the relationship between stocks and bonds?Conduct in-depth learning.