Investors' confidence in long-term US bonds has cooled, with yield spreads approaching a two-year high.

With the increasing volatility in the US Treasury market, the premium on long-term US Treasury yields that investors are currently receiving has reached its highest level since 2022. According to Dow Jones market data, as of Thursday's close, the spread between the 30-year US Treasury yield and the 2-year Treasury yield has widened to 1.015 percentage points. This is the highest extra yield provided by 30-year bonds since January 2022. Looking back to the fall of 2024, this spread was almost at zero, but it has been continuously expanding recently, especially after the US government announced tariff increases last week, causing a significant jump in the spread. Normally, long-term Treasury yields are higher than short-term Treasury yields, but when this gap widens rapidly, it means the government needs to pay higher interest to attract investors to lock their funds for thirty years. Recently, long-term US Treasuries have suffered significant losses. The Biden administration continues to push for tariff hikes, while at the same time, the US House of Representatives is advancing large-scale tax cut plans from the previous Trump era. Reports indicate that the House passed a budget resolution on Thursday, abandoning the commitment to cut spending by at least $1.5 trillion over the next ten years and planning for total tax cuts of up to $5 trillion. With tax revenues decreasing and government spending not significantly decreasing, the US Treasury has had to further borrow to keep the government running. In the current high-interest rate environment, debt costs have increased significantly, exacerbating fiscal pressure. Data shows that in the first half of the 2025 fiscal year, the US federal government's deficit exceeded $1.3 trillion. For bond investors, stable and sustainable fiscal policies are crucial. Once investors believe that the government's debt management is unsustainable, they will demand higher returns to compensate for risks. The attractiveness of long-term bonds is also affected by policy uncertainties and concerns about the US economic outlook. Moreover, significant changes have occurred in the major buyers of US Treasury bonds, foreign central banks. Data shows that as of February this year, foreign central banks have been reducing their holdings of long-term US Treasury bonds for four consecutive months, instead increasing their allocation to short-term Treasury bonds, intensifying the pressure on the long-term Treasury bond market. However, if the US economy enters a recession, the 30-year Treasury yield could decline accordingly. During times of economic instability, investors often shift funds to long-term US bonds seen as safe-haven assets to earn stable interest income. In this scenario, the spread between 30-year and 2-year Treasury bonds may narrow. Nevertheless, Torsten Slk, Chief Economist and Partner at Apollo Global Management, pointed out that even if interest rates decline, the detrimental effects of fiscal deterioration caused by an economic recession will far outweigh the savings in interest expenses. He stated, "Creating a recession cannot improve the budget deficit, because during a recession, the government's fiscal situation will worsen due to factors like reduced tax revenues and increased unemployment benefits, with the impact being twice the savings in interest." In other words, an economic recession is by no means a panacea for solving fiscal problems. The debt management challenge currently faced by the US government necessitates more systematic and sustainable adjustments in fiscal policy, expenditure control, and debt structure; otherwise, the future will face even higher debt costs and market trust risks.