Treasury bonds used to be boring. Pencil in around two percent inflation, estimate a real growth rate and the result is a decent estimate for a fair yield. If an investor wanted to get fancy, they could throw in some term premium and do a little Fed watching.

Those days, it seems, are over. We go from headlines talking about selling pressure in Japanese Government Bonds (JGBs) to fears of overseas investors potentially divesting their U.S. Treasury holdings. In the background, gold is spiking and the dollar is falling. Trying to put all the moving parts together to get a broad perspective on what is happening looks hideously complex.

And, to a certain extent, we believe it is. There are whole textbooks written on these relationships and the feedback loops involved. But like most things in economics, we would argue there is a core simplicity to what we are seeing. If we strip away the jargon and the rhetoric, certain realities emerge—and what follows is a simplified, but still accurate, view of how our team at RiverQuant Asset Management thinks about the Treasury yield curve in the months and years ahead.

ABCs of JGBs

The recent rise in Japanese yields took place largely for domestic reasons, but it absolutely has a global impact. Investors have a choice of where to lend money, and as Japanese yields go up, it puts pressure on other borrowers. Since the U.S. remains by far the world's largest debtor, we think it is inevitably going to be one of the most impacted by this need to pay more to attract and retain capital. This is particularly true given that Japan is the single largest foreign holder of U.S. government debt.

Sure, there are additional complexities. Yields went up in Japan for a reason, so not all of the impact is going to translate one-for-one to the U.S. dollar. Hedging costs also play a role in how yields translate between different sovereign issuers. But those are largely quibbles about the magnitude of the impact on the U.S. from the JGB move—not its direction.

The Japanese bond move also has a psychological impact on Treasury investors. Japan has long occupied the role of counter-example to those concerned with the U.S. debt level. The fact that Japan's debt-to-GDP ratio nearly doubles that of the U.S. was taken by some to mean that U.S. debt would not impact Treasury yields. With the recent JGB selloff, it seems there may be a limit to the debt that markets will overlook.

"The comparison is particularly troubling for U.S. investors since the proximate drivers for the recent JGB move were concerns over large debt loads, expansionary fiscal policy, and underlying inflation pressures. This list has resonance for any U.S. bond observer."— Gabriel Abbas, Chief Financial Officer, Wealthy Asset Management

In short, higher Japanese yields set up a competitor for investment capital, making it more expensive for the U.S. to fund its deficit spending. At the same time, it raises so-called tail risk concerns—or the idea that we could see a rapid repricing of U.S. debt.

The divestment catch-22

Unlike the situation with Japan, we think the divestment issue is more of a distraction than a real influence on U.S. bond pricing.

To begin with, we think it is highly unlikely to occur on a large scale. Divestment is a good threat to have in the background, but once a country sells its holdings, that is it—the threat is done with and the U.S. would then have a free hand to retaliate. Strategically, it is not necessarily a great move.

Even if it were to occur, however, we believe it would largely be a reshuffling of assets versus a long-term, fundamental hit to the United States. What we think would happen is that official and quasi-official investment funds would sell U.S. assets as private investors and hedge funds bought the securities. The end result would likely be a moderate increase in yields to a still manageable level.

"If people want to own U.S. assets, they will find a way. If official capital divests, private capital will backfill. We have seen that story play out dozens of times. In the case of the U.S., the idea of divestment is much more hype than substance."— Cameron Moshfegh, Chief Executive Officer, Wealthy Asset Management

The call is coming from inside the house

We think the simple truth is that the biggest threat to Treasuries does not come from abroad but from U.S. fiscal policy. And while we think that threat is manageable for most Treasury bonds, we have concerns about the 30-year maturity.

Even though the U.S. economy is expanding at an above-average pace, the U.S. budget deficit is hovering near six percent of GDP—an amount that historically was associated with recessions. No one, we believe, would argue that this is a sustainable budget.

It is unclear how, or when, U.S. finances will get back on track, but it seems increasingly likely that it will take an external event to force budgetary sanity on the country. Tariffs and inbound investments could, in theory, assist at the margin, but nothing in the data or projections suggests they will meaningfully alter the debt trajectory.

Dollar daze

Since January 2025, the dollar is down nearly 10 percent against a roughly trade-weighted basket of major currencies. Given the ubiquity of the dollar in global finance, that reality has a way of altering the return perspective on many asset classes. The S&P 500, for instance, turned in a robust 18 percent return in that period; measured in euros, however, it barely cleared a three percent gain. Much of what we think of as rising asset prices is really the impact of using a shorter yardstick to measure value.

The dollar's weakness, we believe, is related to concerns about the debt but is more generally about the predictability of U.S. policymaking and the apparent absence of any roadmap to fiscal sanity. Concerns that debt service costs could rise soon are likely playing a role. Even though the Fed has cut short-term interest rates by 1.75 percent since September 2024, the 10-year government bond yield has risen 50 basis points in that time—leaving the U.S. increasingly forced to choose between stability and price.

"Global bond markets, precious metals, and currencies are sending us a signal on sustainability. We think investors should listen."— Elizabeth Prasad, Portfolio Manager, Wealthy Asset Management

Safety of security

For a long time, the dollar and the Treasury bond served as the preeminent safe haven assets—insurance policies that simultaneously protected and paid the investor. We believe there is reasonable evidence that global investors may feel less secure in being plugged into the dollar ecosystem.

It is important to distinguish this type of gradual reprofiling from active divestment. The former is likely to be driven primarily by traditional risk-return calculations, while the latter is done as a means of applying political pressure even if it is not economically advisable. One reason to believe that the search for safety is a key component of the recent dollar weakness is the concurrent strong performance of precious metals and currencies such as the Swiss franc.

What does this mean for investors?

Our team at Wealthy Asset Management recommends investors consider taking modest, deliberate steps in response to the evolving landscape:

At the end of the day, we think the biggest overhang for longer-term Treasuries and the dollar is the lack of a clear, simple story on why an investor should own them. Not too long ago, that question would have been considered nonsensical. Now, however, U.S. debt dynamics and an apparent lack of interest in returning to a sustainable fiscal path represent major overhangs that cannot be ignored.