The “Sell America” trade that gripped markets this month has left a potentially lasting dent in investors’ willingness to hold the US government’s longest-maturity debt, a mainstay of its deficit-financing toolkit.
For bond managers at BlackRock Inc., Brandywine Global Investment Management and Vanguard Group Inc., the problem is that as President Donald Trump approaches his 100th day in office, he has generated a growing list of unknowns, forcing traders to focus on a broad array of issues beyond just the likely path of interest rates.
To name a few: What do Trump’s trade war, tax-cut agenda and scattergun policymaking mean for already weakening economic growth, sticky inflation and massive fiscal shortfalls? Will he again threaten to fire Federal Reserve Chair Jerome Powell? Is he actively seeking a weaker dollar?
The result is a heightened notion of risk that’s leading bond buyers to question the traditional haven status of US government debt and require higher yields on longer maturities. By one measure, that added cushion, which traders dub the term premium, is around the highest since 2014.
“We’re in a new world order,” said Jack McIntyre, who with his team oversees $63 billion at Brandywine. “Even if Trump backpedals on the tariffs, I think uncertainty levels are still going to be elevated. So that means term premium stays elevated.”
Of course, some of the angst around Treasuries could well fade should Trump strike trade deals or continue to signal that he’s wary of a full-fledged rout in bonds. But as Treasury Secretary Scott Bessent prepares to unveil the government’s latest borrowing plans on Wednesday, he faces the added task of calming investors grappling with a growing host of concerns.
All the uncertainty is leading McIntyre to stay roughly neutral to his benchmark. It’s also changing how he sees the long bond behaving in the event of an economic slowdown. In a nutshell, he says yields would remain higher than he’d otherwise expect.
No Flight
It’s not as if investors are fleeing Treasuries wholesale. JPMorgan Asset Management sees them as a better bet than European government bonds. And this month’s 30-year Treasury auction showed that there’s appetite for the maturity — at the right price. The result allayed fears of a buyers’ strike, and long-bond yields have eased back from their recent peak.
Sentiment, however, remains fragile. For example, while Trump last week said he had “no intention” of firing Powell, his criticism of the Fed chair leaves some investors worrying about the central bank’s independence.
Pacific Investment Management Co., which likened this month’s episode of triple-weakening in the dollar, US stocks and Treasuries to something one might expect in emerging markets, has also been buying Treasuries. But it’s been limiting how far out the yield curve it goes. The $2 trillion bond manager currently favors maturities from five to 10 years.
There are other signs of investor anxiety around the long bond: After adjusting for inflation, 30-year yields this month reached the highest since the financial crisis. Although they’ve since receded, they remain higher than when Trump announced his plan for sweeping tariffs on April 2.
For Vanguard, there’s scope for the extra insurance being built into longer maturities to swell further, especially if widening federal deficits lead to more bond issuance.
“Term premium is no longer low, but you can’t make a case that it’s historically high,” said Rebecca Venter, senior fixed-income product manager at the roughly $10 trillion asset manager. “When you see the fiscal risks in the background, term premium can build over time.”
Vanguard expects US growth below 1% this year, which would be the weakest since 2020, and Venter said “that does not bode well for the US budget deficit.”
Next Chapter
When the Treasury releases its latest bond issuance plans this week, Wall Street expects steady auction sizes over the next three months. With Republicans debating how to pay for their tax-cut bill, the fiscal story is the next chapter for the term premium.
One reason a fatter premium matters is that every fraction of a percentage point in extra yield counts for the government at a time when it’s paying upwards of $1 trillion per year to service its debt.
At BlackRock, which oversees almost $12 trillion, the broad slide across US asset classes earlier this month magnified its concerns around the government’s finances post-pandemic, and how US bonds were vulnerable to shifting investor confidence.
The selloff in US markets “suggests a desire for more compensation for risk and brought that fragile equilibrium into sharp focus,” BlackRock Investment Institute said in a report.
George Catrambone at DWS Americas sees how the term premium might recede, but only so far, given all the shifting signals out of the White House on tariffs and other policies.
“Once greater clarity is given and agreements are reached, I’d expect term premium to abate,” said the firm’s head of fixed income. “Although not back to the lows of the past decade as fiscal will be an ever-present concern.”
What to Watch
- Economic data:
- April 28: Dallas Fed manufacturing activity
- April 29: Advance goods trade balance; wholesale, retail inventories; FHFA house price index; S&P CoreLogic home prices; Jolts jobs openings; Conference Board consumer confidence; Dallas Fed services activity
- April 30: MBA mortgage applications; ADP employment; GDP; employment cost index; personal income and spending; MNI Chicago PMI; PCE price deflator; pending home sales
- May 1: Challenger job cuts; initial jobless claims; S&P Global US manufacturing index; ISM manufacturing; construction spending
- May 2: Non-farm payrolls; factory orders; durable goods orders; capital goods orders
- Fed calendar:
- Communications blackout before May 7 policy decision
- Auction calendar:
- April 28: 13-, 26-week bills
- April 29: 6-week bills
- April 30: Treasury quarterly refunding announcement; 17-week bills
- May 1: 4-, 8-week bills
