Compared to a year ago, the US Treasury curve has steepened considerably. While yields at the front end have dropped due to anticipated rate cuts, the long end of the curve has not budged. In fact, long-end bonds have sold off, giving bond investors the opportunity to lock in elevated yields. That’s quite a tempting thought, considering we’re talking about the US, which sets the global reference rate for many asset classes.

In economies where GDP growth is constrained by high levels of debt and unfavourable demographics, governments either need to hope for a productivity boom or be prudent with spending plans to keep debt-to-GDP metrics in check. Achieving the latter can be challenging given the pressures of rising geopolitical tensions and the structural incentives in democratic systems that often prioritise short-term spending commitments during election cycles. This, in turn, increases the odds of inflation playing a larger role in achieving fiscal sustainability in the future. In a world of financial repression, an opportunity to lock in positive real yields at 2-2.5% is worth considering. But, it is not a slam dunk. Below, we share are a few concerns that keep us on the sidelines for now.

Risk one: absence of productivity boom

Running fiscal deficits when yields are high and debt-to-GDP levels are elevated can be risky business. The US is currently doing just that which explains why the bond market has revalued the compensation it demands for owning long-dated US Treasuries. The Congressional Budget Office (CBO) sees federal debt rise from 100% to 118% of GDP by 2035, reporting the highest point in US history.

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