U.S. Treasury yield spike has investors rethinking the rest of the world

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May 22, 2025
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Traders work on the floor of the New York Stock Exchange on May 21, 2025, in New York City.

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A U.S. Treasury selloff is prompting some market watchers to reassess their stance on fixed income allocation, after “relentless” action from yields on long-dated Treasurys saw those bonds surpass a key 5% threshold.

Yields on 20- and 30-year Treasurys were marginally higher on Thursday, trading at 5.136% and 5.128%, respectively. Both notes were up as much as 5 basis points earlier the session, before paring gains.

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Bond prices and yields move in opposite directions, meaning yields rise when the assets sell off. The moves in the U.S. Treasury market come amid a U.S. credit downgrade and mounting concerns around fiscal spending plans outlined in a Republican spending bill.

Yields on Treasurys with shorter-term maturity periods have also risen in recent weeks. The benchmark U.S. 10-year Treasury note was last seen trading at 4.593% on Thursday, erasing gains from earlier in the session.

Surging U.S. government borrowing costs have prompted some market watchers to rethink the status of American government bonds as a go-to safe investment.

U.S. staring into ’emerging markets trap’

Russ Mould, investment director at AJ Bell, labelled the rise in U.S. Treasury yields “relentless,” noting that it was a reflection of “growing disquiet” over swelling U.S. federal debt.

“None of this may have looked like a problem when the Fed Funds rate and benchmark bond yields were anchored at record-lows — but it is a potential problem now,” he said in an email.

Mould added that half of publicly held Treasurys — or some $14 trillion of federal debt — would soon mature and need to be refinanced at higher rates.

“Emerging market investors will be very familiar with the risks attached to the current situation,” he said. “Higher bond yields mean higher interest bills, higher interest bills mean more debt, more debt may mean QE [quantitative easing] or efforts to loosen monetary policy, only for that to perhaps lead to higher inflation, higher interest rates, higher bond yields and around we go again.”

“This is a classic emerging market trap, except America (and for that matter Japan) are staring right into it,” Mould added.

Japan has also seen long-term government borrowing costs rise this week, with the yield on the country’s 30-year bonds hitting a record high of 3.14%. Japanese 20-year bond yields also ticked higher, reaching 2.555% — their highest rate in 25 years. The 30-year yield was last seen at 3.184% on Thursday, while the 20-year yield stood at 2.598%.

Paul Skinner, investment director at London’s Wellington Management, told CNBC the closing gap between yields on American and Japanese bonds meant the latter’s investors were pulling money out of the U.S. and back into Japan.

“The savings that have been dispersed around the world — and there’s a lot of talk about how much is parked in the U.S. at the moment — it’s going to start repatriating,” he said.

“We see clients pulling back from the United States… And the data we look at shows that we’ve seen monthly repatriation purchases of Japanese assets that [are] you know, two, three times what they’ve ever been — now suddenly they get 3.1% on their own domestic bonds, and they don’t have the currency risk. So they’ve got incentive of … proper yields on their bonds. Why wouldn’t they come home now?”

Emerging markets appeal

For Chris Metcalfe, chief investment officer at Kingswood Group’s IBOSS, an allocation to global emerging markets debt “makes absolute sense.”

“Yes, US bonds have a more attractive starting yield than they had previously, but the reasons for that increasing yield remain and in the last few hours have become more acute,” he said.

“The move away from US assets is unprecedented and it’s impossible to say right now how high US Treasury yields could go,” he explained. “We particularly like managers who use a blended approach to emerging market debt and can take best advantage of the huge fluctuation in currencies.”

John Murillo, chief dealing officer at London-based liquidity solutions provider B2BROKER, argued that U.S. Treasurys still offer investors a level of safety and liquidity that remains “unparalleled by most other investment instruments” — but he also noted that the historically-held notion of Treasurys being close to risk-free investments may need to be revised.

Like Metcalfe, he said that various emerging markets government bonds could be strong options for investors looking to diversify 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,” Murillo said.

“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.”