Trump's deputy warns US debt could spiral into a "death spiral", while foreign capital remains completely unconcerned.

No matter if it is the largest fund management company in Europe, a large pension fund in Australia, or a cash-rich insurance company in Japan, when it comes to US treasury bonds, they all express the same viewpoint: US bonds are hard to beat. Four months ago, Vice President-elect JD Vance of the United States stated concerns that US bonds might face a "death spiral" if bond vigilantes try to push up yields. Four months later, companies including Legal & General Investment Management and Amundi SA have said that they are willing to give the new government the benefit of the doubt. Despite the historic bear market of US bonds, global funds have plenty of reasons to buy. Currently, US bond yields are still far higher than bonds in places like Japan, while Australia's rapidly growing pension industry is increasing its holdings of US bonds every month due to market depth and liquidity. Compared to some European sovereign markets struggling to address their own fiscal issues, the US seems like a safer bet. Investors are also pleased with Trump's nomination of hedge fund manager Benson as the Treasury Secretary in charge of overseeing government bond sales. Benson is scheduled to hold a confirmation hearing in the Senate on Thursday, with a goal of reducing the deficit as a percentage of GDP through tax cuts, spending limits, deregulation, and cheap energy. Chris Jeffery, head of macro strategy and asset management at Legal & General Investment, stated, "The risk of a 'death spiral' is that any bond market might fall into a cycle of rising yields and debt expectations reinforcing each other." However, "the incoming Treasury Secretary mentioned a goal of a deficit reaching 3% by 2028. If the federal government adopts such a wish, bond investors have no reason to continue standing on the sidelines." The stance of overseas investors on US bonds is more crucial now than ever. According to the latest US government data, as of the end of October last year, foreign funds held $7.33 trillion in long-term US debt, accounting for about a third of outstanding debt, slightly lower than September's record of $7.43 trillion. The debate over whether to continue buying US bonds centers on the fact that the US federal deficit has reached its highest level outside of extreme periods like the pandemic and the global financial crisis. There are many signs that investors are growing uneasy. The benchmark 10-year US bond yield has jumped over a percentage point since hitting a low in September last year, and is likely to breach the key psychological barrier of 5% again. On Wednesday, the 10-year US bond yield fell 14 basis points to 4.65%, the first decline in nine days, influenced by mild US inflation data. As the largest foreign holder of US bonds, Japanese investors are aware of the increasing risks, but they remain eager buyers. Naomi Fink, chief global strategist at Nikko Asset Management in Tokyo, stated, "The mainstream view in the market is that the US bond market is too large, too liquid, and the US coin tax is deeply ingrained, making it impossible to weaken the core low position of US bonds in global central bank reserves." She said, "In our base case, we expect an orderly adjustment of US bond yields. However, we believe that the likelihood of a more disruptive adjustment, although still small, has increased." One reason Japanese investors favor US bonds is that they provide exposure to the unstoppable US dollar. By 2024, the country's funds will gain a 12% return from their unhedged investments in US bonds, with much of that return (11.5%) coming from the appreciation of the US dollar. European Perspective European funds are generally optimistic, stating that US bond yields are unlikely to soar, especially since Trump seems to realize the need for global investors' support. Anne Beaudu, Deputy Director of Global Macro Strategy and Asset Management at Amundi in Paris, stated that the market expects the new government to mean increased economic growth and CPI inflation, which has led to a steepening yield curve, but this actually makes US bonds more attractive. She said, "US bonds seem more attractive at these levels, as rising yields will ultimately impact growth prospects or the performance of risky assets. However, the market will remain cautious until Trump's agenda is further clarified." As the US debt size grows, at least some global funds are cautious about US bonds. According to the latest data released in October, for the fiscal year ending in September, the budget deficit soared to $1.83 trillion. If Trump fulfills his promises of tax cuts and increased spending, the deficit is expected to further widen. Kaspar Hense, Senior Portfolio Manager at RBC Bluebay Asset Management in London, stated, "With a large amount of new bond issuances entering the market, the yield curve will remain very steep, which will again have a negative impact on US bonds." He added that US bond yields are likely to soar, similar to what happened during the term of former UK Prime Minister Thatcher in 2022. However, BlueBay stated this week that recent selling of US bonds has led the company to reduce some bets on the 30-year US bond yield being lower than the two-year US bond yield.