US bonds are flashing a warning

Key points:

• Rising yields send warnings with the dollar falling: Investors are demanding a fiscal risk premium, not pricing in growth.
• Global markets are outperforming: Europe and China are seeing inflows as confidence in U.S. assets wanes.
• Diversification is critical: Both across geographies and asset classes, especially with policy uncertainty, structural deficits, and the potential political volatility ahead.

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The bond market is sending out distress flares. Yields are climbing—but instead of strengthening the U.S. dollar, they are coinciding with a weaker USD. For investors, this isn’t a vote of confidence in U.S. growth. It’s a sign that something may be breaking beneath the surface.

The scoreboard tells the story

While the S&P 500 is down slightly this year, other global markets have surged:

• S&P 500: -0.6% YTD
• Germany’s DAX: +21% YTD
• Hong Kong’s Hang Seng Index: +18% YTD

Capital is moving—quietly but clearly—toward markets with attractive valuations and supportive policy backdrops.

What’s driving the disconnect?

• Fiscal risk premium: Investors are starting to demand more compensation for holding U.S. Treasuries. With deficits ballooning and political uncertainty rising, higher yields may not reflect optimism—but concern.
• Diminished confidence in U.S. assets: In a typical cycle, higher yields draw in foreign buyers. But if the USD is falling despite those yields, it could signal that investors are starting to look elsewhere—questioning U.S. exceptionalism.
• Repricing of Fed expectations: Markets may be anticipating rate cuts as economic momentum fades, but long-end yields are rising due to sticky inflation or supply concerns. That’s a bearish steepening—not the kind that fuels rallies.

What it means for investors?

This combination suggests a fragile market regime—where nominal returns may look attractive, but real risks are rising. This is a time to be selective and strategic:

• In the U.S., focus on quality—names with pricing power, healthy balance sheets, and global exposure.
• Rebalance towards global equities and emerging markets where the policy cycle is more supportive.
• Consider exposure to sectors benefiting from stimulus tailwinds in Europe and China
• Consider currency diversification as the USD weakens and FX volatility rises
• Gold deserves a second look—while higher yields often weigh on gold, this time it’s being supported by central bank buying, fiscal risks and a desire for stability.

Markets are shifting. It’s not just about chasing yield—but understanding what that yield is really telling us.