U.S. Treasuries ended May on a sour note, delivering their first monthly loss of 2025, as investors grappled with growing fiscal concerns, unpredictable trade policy shifts, and rising long-term yields. Renewed anxiety over the federal deficit and the uncertain trajectory of U.S.-China tariffs contributed to a broad selloff across the Treasury curve, signaling deeper discomfort among fixed-income traders about Washington’s fiscal trajectory.
Bloomberg Treasury Index Drops Over 1.2% in May
A Bloomberg index tracking U.S. Treasuries across maturities fell by more than 1.2% through Thursday, marking the worst monthly performance so far this year. Yields rose across the curve, with the 30-year yield climbing for a third straight month — the longest such stretch since 2023 — while both two- and 10-year yields logged their first monthly gains of 2025. The two-year yield ended May at 3.9%, up from April’s 3.6%, despite a modest four-basis-point retreat on Friday.
Highlights:
Bloomberg Treasury Index fell 1.2% in May, first monthly decline in 2025.
30-year yield posted its third straight monthly increase.
Two-year and 10-year yields rose for the first time this year.
Budget Deficit Fears Erode Safe-Haven Demand
Investor concern over the U.S. fiscal outlook intensified in May, as former President Donald Trump continued negotiations with Congress on a tax-cut-laden spending bill. The prospect of deeper deficits has begun to impact the term premium — the extra yield investors demand for holding longer-term bonds — which Citigroup projects could rise another 50 basis points over the next year.
Timothy Graf of State Street Markets said the 10-year Treasury yield may push toward 5%, driven not by inflation but by the need to reprice debt amid worsening fiscal metrics. The weakening demand for long-duration Treasuries reflects diminished confidence in the U.S. government’s ability to restrain deficits, especially amid rising global supply of safe assets.
Highlights:
Investors are demanding higher term premiums for long-dated Treasuries.
Deficit expansion under potential Trump tax policies weighs on sentiment.
10-year Treasury yield seen possibly reaching 5% amid repricing concerns.
Trade Uncertainty Amplifies Market Volatility
Tariff policy returned to the spotlight in May after Trump accused China of violating a recent agreement to scale back retaliatory tariffs. The renewed rhetoric cast doubt on the tentative détente struck earlier this month between Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng. Bloomberg reported that the U.S. may expand export curbs to include subsidiaries of already-sanctioned Chinese firms, reigniting fears of a fresh trade war.
While Trump expressed hope that a conversation with Chinese President Xi Jinping could ease tensions, markets remain wary. The unclear trajectory of U.S.-China relations adds another layer of volatility to an already fragile macroeconomic landscape, especially for long-end bondholders.
Highlights:
Trump accused China of violating recent tariff agreement.
U.S. mulls broader export restrictions targeting Chinese tech subsidiaries.
Renewed trade tensions add to investor unease about Treasury market outlook.
Economic Data Reflects Slower Growth, Supports Short-Term Bonds
On the final trading day of the month, data showed that U.S. imports declined in April, consumer spending decelerated, and inflation metrics remained tame. The core PCE index aligned with expectations, reinforcing the case for a Federal Reserve rate cut later in the year. Money markets are pricing in approximately 50 basis points of Fed rate reductions by December, which supports the outlook for shorter-term maturities even as longer bonds struggle.
Goldman Sachs’ John Waldron said that among bond traders, the U.S. debt trajectory is now viewed as a greater risk than tariffs. RBC BlueBay’s Mark Dowding projected that 30-year yields could reach 6% or higher, citing reduced foreign demand and growing reliance on domestic buyers.
Highlights:
April data showed slowing imports, weaker consumer spending, and soft inflation.
Fed rate cuts remain on the table; short-end bonds remain relatively supported.
Traders see deficits, not tariffs, as the dominant driver of long-end weakness.
Dollar Assets Losing Shine as Yield Fair-Value Gap Shrinks
Man Group’s Henry Neville pointed to a shrinking gap between actual 10-year Treasury yields and their theoretical fair value as a sign that U.S. assets may be losing their global safe-haven appeal. His analysis shows that the spread has averaged just 150 basis points since 2020 — the narrowest for any decade since the 1960s. Between May 2023 and July 2024, the gap stayed below 100 basis points for 15 consecutive months, the longest such streak on record.
Neville warned that persistent readings below 100 basis points are a key signal that foreign investor appetite for U.S. Treasuries and dollar-denominated assets may be fading, which could further elevate long-term yields as the U.S. government is forced to rely more heavily on domestic capital.
Highlights:
Fair-value gap for 10-year yields near historic lows, signaling weaker global demand.
Longest-ever streak below 100 basis points from May 2023 to July 2024.
Shrinking foreign demand could drive 30-year yields toward or above 6%.
US Treasuries Post First 2025 Loss Amid Deficit and Tariff Fears
US Treasuries recorded their first monthly loss of 2025, declining over 1.2% in May, driven by renewed fiscal deficit concerns and resurfacing trade tensions with China. Rising yields across all maturities, particularly on the 30-year note, reflect investor unease with unpredictable fiscal policy, heightened debt issuance, and uncertainty over future Federal Reserve rate moves.
Bond traders are increasingly demanding higher term premiums, anticipating sustained supply pressures and questioning the US dollar’s safe-haven status. This shift signals a deeper concern about structural fiscal risks, with long-end yields potentially climbing further, pressuring equity markets and risk assets.
Impact on Stock Market and Investors:
Investor Confidence at Risk: Rising yields erode appetite for equities, especially growth and tech stocks, as borrowing costs rise.
Yield Curve Watch: A steepening curve may signal investor concerns over long-term inflation and fiscal health, pressuring valuations.
Rate Cut Bets Intact: Shorter-term yields still reflect expectations of Fed rate cuts, offering opportunities in short-duration assets.
Rotation Risk: Investors may rebalance toward value or dividend-yielding sectors amid bond market volatility.
Impact on Indian Stock Market:
FII Sentiment Sensitive: Rising US yields and risk-off global sentiment may trigger foreign outflows from Indian equities.
Rupee Under Pressure: Reduced global demand for US Treasuries and dollar instability could cause INR volatility.
Rate-Sensitive Sectors Exposed: Banking and real estate may react to global bond yield movements if domestic rate trajectory gets influenced.
Export Headwinds: Renewed US-China trade tensions could weigh on global demand, affecting Indian exporters.
Focus Points for Investors:
Monitor US Bond Yield Trends: Watch for shifts in 10-year and 30-year yields; steepening curves signal macro shifts.
Diversify Globally: Consider hedging currency and interest rate exposure across geographies.
Stay Alert to Trade News: US-China developments could ripple into emerging markets like India.
Review Asset Allocation: Balance between equity and fixed income depending on duration risk and rate outlook.
