Lessons from history

Today, the yield on US 30 year Government bonds moved more than 1% above that paid by equivalent 5 year maturities. The first time since COVID that has happened. At time of writing (20 May 2025), the difference has fallen back to 0.98%

The US Treasury “yield curve” has steepened aggressively in recent months – investors demanding more income to own long maturity bonds compared with shorter ones

Thankfully our portfolio has been well positioned for this move.

Why has this move happened?

There are several possible reasons

1. The US is running a fiscal deficit of around 7%. The government spending $1.07 per $1.00 it earns. That increases the risk to investors of a default on treasury securities
2. This is NOT new, however President Trump intends extending a tax cutting agenda which will add materially to the US debt pile
3. US Debt as a percentage of GDP is likely to move well over 100% in coming years, leading ratings agency Moody’s to downgrade the US from Aaa – arguably a decade too late, but still enough to concern investors
4. Economic uncertainty, in particular with regard to tariff and trade policy threatens to raise US inflation from levels already above target. High inflation reduces the value of long dated bonds
5. This quickly becomes a vicious spiral – higher yields mean the US may spend more servicing its debt than it spends on defence

It is likely a combination of the above factors

What is the implication of a steeper curve?

Going back to 1970, we can see that the US curve normally steepens AHEAD of a recession (marked in RED below) – indeed statistically for a recession to occur, the relationship between 5 and 30 year bonds needs to be above 0.85%. Today it hit 1.00%. Since 1980 there has only been ONE false signal. The bond market is telling us that to avoid recession, this needs to be false signal number two.

Source: Bloomberg

The bond market has no crystal ball. Risk bulls will tell us “it’s different this time”. It may be a brave call to agree..