US government bond yields went up this week. The 30-year Treasury yield crossed 5%, and the 10-year yield moved above 4.5%. This increase followed Moody’s decision to downgrade the US government’s credit rating. According to the GMS team, the rise in yields shows that investors are less worried about a recession, expect higher inflation, and are concerned about the US government’s growing budget deficit. As a result, the team now prefers safer investments in Asia-Pacific (APAC), like high-quality government and corporate bonds.
Impact of Moody’s Downgrade on Markets
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The downgrade itself is not expected to change how most investors handle US Treasuries. Since 2013, many investment rules have been updated to treat US Treasuries as a separate category, not just part of the AAA-rated group.
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What matters more are the reasons behind the downgrade, especially the ongoing debates in the US Congress about the federal budget.
Why Moody’s Downgraded the US
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The US is running a high budget deficit — nearly $2 trillion a year, which is more than 6% of its economy.
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Reducing government spending probably won’t fix the deficit in a meaningful way.
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A Republican tax and budget bill recently failed in the House of Representatives due to disagreements within the party.
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The Trump administration may find it hard to shift from trade-focused policies (like tariffs) to growth-friendly ones (like tax cuts), especially if those cuts make the deficit worse.
Why Treasury Yields Are Rising
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Investors are reacting to several things: less fear of recession, rising inflation expectations, and worries about the growing US deficit.
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Some investors (sometimes called "bond vigilantes") are selling Treasuries to push back against rising deficits, but there’s no need to panic.
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The US government still has many tools to manage its debt and spending.
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The debt ceiling will likely be raised again (just like it was in 2023), foreign investors still hold onto US Treasuries, and the Federal Reserve is unlikely to make sudden changes because of political pressure.
What This Means for Investors
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We are watching US budget talks closely. If the government needs to issue more bonds, yields could rise further and the yield curve may steepen.
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On the other hand, if revenues go up from tariffs (and tax cuts are delayed), the deficit might shrink — which could help lower yields.
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The long-term outlook for US debt is still uncertain. That’s why US real (inflation-adjusted) yields remain low and may stay low for now.
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We recommend investors stay diversified and think this could be a good time to invest in top-rated government and corporate bonds in the APAC region.
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