"Safe-haven asset" status is questioned as US bond yields hit key high levels

After Moody's downgraded the US sovereign credit rating last week, the US Treasury bond yield fell from its intra-day high on Monday but still remained at a high level, highlighting the market's ongoing concerns about the US fiscal situation. The yields of several key maturities touched or approached levels that are highly sensitive in the financial markets. Data shows that the 30-year US bond yield rose to 5.03% at one point, the highest since November 2023, before falling back to 4.921%, still up 2 basis points from the previous trading day. The 10-year US bond yield also rose 2 basis points to 4.459%, while the 2-year US bond yield fell slightly by 1 basis point to 3.972%. It's worth noting that bond yields move in the opposite direction to prices, so a higher yield means lower prices. Although Moody's downgrade initially unsettled the market, as the trading day unfolded, some investors chose to buy US bonds on dips, pushing yields to slightly retreat from their highs. Last Friday, Moody's lowered the US long-term sovereign credit rating from the highest level of "Aaa" to "Aa1" citing the increasing budget deficit of the US government and the significantly rising the costs of rolling over old debt in a high interest rate environment. Moody's stated, "The downgrade of the rating to the second-highest level in our 21-level credit rating scale reflects the more than decade-long increase in government debt, and interest expense as a share of revenue that is notably higher than other Aaa-rated sovereigns." Since 1949, the US has maintained Moody's "Aaa" sovereign rating. Now, the US rating has finally become consistent among the three major rating agencies, all at the second-highest level. Deutsche Bank analysts stated in a report, "This is a significant symbolic shift, as Moody's was the last major rating agency that still rated the US at the highest level." In fact, as early as April this year, US Treasury bond yields had surged due to the Trump administration's announcement of large-scale "tariffs". At that time, the 10-year bond yield broke through 4.5%, and the 30-year yield rose to 5%, causing market panic and forcing the government to urgently slow down the pace of tariffs to avoid greater impact on consumers and financial markets. Now, after the Moody's rating downgrade, the long-term US bond yields have returned to this high range. Since mortgage and other consumer credit rates usually reference the 10-year bond rate, this increase means that the borrowing costs for ordinary consumers will further rise. In terms of fiscal policy, House Republicans continued to advance the tax and spending bill proposed by Trump this week. The bill has been passed by the House Budget Committee on Sunday evening, but it is estimated to further increase the federal deficit to trillions of dollars in the coming years. Moody's explicitly stated in the downgrade, "Prior US administrations and Congresses have failed to agree on effective plans to reduce the large annual deficit and interest costs. We do not believe that the fiscal proposals currently being discussed will achieve substantial mandatory spending or deficit cuts over many years." Aditya Bhave, an economist at Bank of America, wrote in a report, "In the tug of war between tax cuts and tariffs, Moody's seems to be warning that it believes these policy changes will worsen the overall US fiscal trajectory." He added, "Tariff revenue cannot offset the costs of the tax cuts bill, and we agree with this." With the expanding fiscal deficit, increasing policy uncertainty, and credit rating downgrades, the market is starting to reassess whether US Treasury bonds still hold the status of a global "safe haven". For a long time, US Treasury bonds have been seen as one of the most reliable assets globally due to their low risk and high liquidity. However, sustainability issues of the debt are shaking this belief.