1. Dangerous signals from the 20-year bond auction
The recent 20-year US Treasury bond auction failed to meet expectations, recording weak demand from investors, especially foreign investors – a group that constitutes a large share of long-term bond purchases. This is not only a poor technical result but also a strong warning about the declining confidence in US public debt.
George Saravelos from Deutsche Bank is straightforward: foreign investors are withdrawing, no longer wanting to continue financing the enormous federal spending, especially as borrowing costs rise and fiscal risks remain unresolved.
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2. Reasons behind the flight from US bonds
There are two key factors:
• High financing costs: When the Federal Reserve (Fed) keeps interest rates high for an extended period, issuing more debt becomes more expensive. The US government cannot continue to 'print money' to manage its budget.
• Confidence in fiscal adjustment capabilities is eroding: Unless the Republican Party and the current administration reach an effective budget agreement, investors will continue to lose faith in the US's ability to repay debt and control spending.
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3. Domino effects in the financial markets
Three main markets reacting negatively:
• Stock market: The S&P 500 index fell 1.5%, indicating that money is flowing out of risky assets.
• US Treasury bonds: 10-year yield rises to 4.607% – the highest since mid-February. Rising yields mean bond prices are falling – a clear manifestation of selling pressure.
• US Dollar Index (DXY): Down 0.5%, reflecting global investors' apprehension about the short-term financial health of the US.
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4. Possible consequences if this trend continues
If demand for US bonds continues to weaken:
• The US government is forced to raise issuance interest rates to attract capital, leading to higher borrowing costs throughout the system.
• The risk of losing fiscal control is becoming increasingly evident, especially if the Fed is forced to maintain high interest rates contrary to expectations of rate cuts in the second half of the year.
• Global markets will witness a wave of flight from US assets, driving gold, Bitcoin, and other safe-haven assets up significantly.
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5. Strategic perspective: What should investors do?
In this context, investors need to:
✅ Closely monitor upcoming government bond issuances and the level of foreign participation.
✅ Be cautious of the shift of capital flows to other markets (gold, crypto, emerging markets…).
✅ Carefully manage portfolio risk, avoid over-leverage during periods of interest rate volatility.
✅ Enhance fiscal risk assessment as a factor affecting long-term investment portfolios.
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Conclusion
The bond auction, which seemed to be a purely technical financial event, has triggered a wave of deep concern about the structural financial situation in the US. In the context of polarized politics and budget spending out of control, the market is beginning to 'price in' national risks that were previously thought to be impossible.
Leave a comment below: Do you still believe that US bonds are the safest asset in the world? Or are we entering a new era where the market begins to judge the US government?
