10th June 2025
Bonds are no longer the boring bet
There once was a time when bonds were perceived as safe albeit dull – regarded as good ballast to diversify investment portfolios but not likely to cause any major excitement in the markets.
Alas, those times are long gone. Recently, there’s been an increase in volatility in bond markets, which has given rise to the question: how and where is best to invest?
Is it One Big Beautiful Bill?
President Trump’s tariff wars have caused ongoing market volatility, resulting in more fluctuation in the bond markets over recent months. But Trump’s One Big Beautiful Bill Act (OBBBA) has resulted in the bond yields moving higher yet again. The bill was recently passed by the US House of Representatives and is expected to add a further $2.7 trillion to the already huge deficit of approximately $36 trillion over the course of the next decade.
As the US deficit increases, the US government will be required to spend more to service it. This will lead to higher borrowing costs as investors will regard US treasuries as having an increased risk and will expect a higher yield.
This has proven true with a sharp increase in the yields on longer-duration treasuries of 10 years or more. Over the last few weeks, these reached 5% and then fell back. However, this isn’t just the case in the US. There’s been a rise in yields on longer-term UK gilts, and Japanese government bonds (JGBs) hit yield highs during the same period.
Earlier in the month, the CEO of JP Morgan Chase, Jamie Dimon, warned that if the US doesn’t bring down its record debt levels then the bond market was in “danger of cracking”.
Low appeal for long-term bonds
While some investors believe the higher yields are an investment opportunity, others are voting with their feet and choosing to move away from longer-term bonds.
Last month, Japan auctioned off 20-year government bonds, which was met with little enthusiasm and demand. A subsequent US auction of 20-year treasuries was met with a similar response from investors. In the meantime, the UK is issuing more short-duration gilts due to low levels of interest in 30-year gilts.
The Fixed Income Strategist at St. James’s Place, Greg Venizelos, says:
“Longer-duration bonds are challenging because we get so much noise and movement, even if yields ultimately don’t rise that much.
“The volatility on its own undermines the attractiveness of being at that end of the curve, as we say. And of course, the US treasury market is a massive market, as Jamie Dimon has flagged.”
Venizelos also notes that it’s not just the long-term bonds that have seen yields rise, the same applies to short-term bonds. He indicates that while movement at the long end is as a result of fiscal concerns and fear surrounding debt sustainability, the tariff disturbance is creating short-term inflation issues at the short end.
Consequently, mid-term bonds are more in demand. They’re seen as lower risk than long-term bonds and offer incrementally more yield than short-term bonds.
Venizelos continues:
“This is sometimes described as the butterfly trade. As investors are trying to move away from the longer end of the curve, they come towards the belly, say between three and seven years. This is a lower risk to the long end and more value to the short end.”
There’s already been a dip in demand for US treasuries and there are indications that this fall could continue.
All markets have a global component, and if something happens to one market – particularly one as dominant and as influential as the US – it impacts on other markets. The Japanese government bond market (JGB) went through a regime change that has seen the yield on 30-year JGBs rise significantly. Venizelos notes that when comparing the two countries, the yield a Japanese investor would currently receive when buying JGBs is far more attractive than what they’d get in the equivalent treasury after foreign exchange hedging costs.
This doesn’t mean to say that Japanese investors will start selling US treasury holdings to purchase JGBs, but they might be more reluctant to buy treasuries. In terms of demand for the stock of treasuries that need to be refinanced, this is already significant.
Is a bond market implosion likely?
Dimon highlighted the threat to the US bond market – and consequently other bond markets – as a result of escalating US debt, so how likely is a bond market implosion? And do bond investors have cause for concern?
It’s undeniable that if all these factors come together, there’ll be a significant increase in pressure for global markets.
Venizelos goes on to say:
“If you get a major incident in the treasury market, there will be material spillovers to global risk, global appetite, stock markets, currencies and what happens to the dollar – everything can be affected.”
However, he does believe that Elon Musk and President Trump’s public spat could have a silver lining as it’s creating awareness of the likely cost of the OBBBA. A revision to the planned act may therefore be possible, which will ease pressure on the overall bond markets.
“I think more senators are getting cold feet about this so-called beautiful bill. The deficit is already big as a percentage by any standard and on the biggest economy out there. If the bill goes ahead, it may be getting out of control.
“Ultimately there needs to be more caution on what the US administration actually does rather than says. So, while it will pass something, it will hopefully be a lot more diluted.”
Equities on the up
Even though OBBBA has caused uncertainty, US equities maintained their recovery path. Last week, the NASDAQ and S&P 500 rose by 2.2% and 1.5% respectively.
For Europe, the MSCI Europe ex UK finished the week up 1.1%, following the European Central Bank’s vote to reduce rates by 0.25% to 2.0% to help encourage more economic growth. Inflation has been relatively benign across the continent, and the market is anticipating a further cut later in the year.
Additionally, the FTSE saw a 0.8% rise last week, continuing to push back towards the record level that it set earlier in the year.
Providing your business with a solid foundation
Determining a practical governance framework is a must for every organisation and should be based on the structures and systems that suit them best. There’s no such thing as a ‘one size fits all’, off-the-shelf package when it comes to these matters.
Having said this, there are some core elements that can direct your thinking and help you create your own response:
What’s been summarised above should act as a cycle of activity that applies to your corporate existence rather than be a checklist. Success in these areas will boost confidence in expansion plans, further attracting, supporting and retaining customers, suppliers and a committed workforce.
The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2025. FTSE Russell is a trading name of certain of the LSE Group companies.
“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.
© S&P Dow Jones LLC 2025; all rights reserved.
Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
SJP Approved 09/06/2025