The Fed cuts interest rates, U.S. bonds lead the way! Outperforming global sovereign bonds this year.

With the recent wave of "New Round of Fed Rate Cut Expectations" sweeping through the global financial markets, overturning traders' widely held bearish views on US Treasuries since 2022, US Treasury investment returns have jumped to the top of the most core sovereign bond markets. Bloomberg Index statistics show that, in local currency terms, the yield on these US government securities in 2025 is 5.8%, the best performance among the 15 largest bond markets globally. As an important sign of this strong rally, the excess returns of US Treasury assets compared to their global peers, although still significant and far exceeding developed markets, have fallen to near their lowest level in three years. Indeed, for international investors who price assets in US dollars, the weak US dollar exchange rate so far this year has boosted the returns of overseas assets relative to US Treasuries. However, when excluding exchange rate factors and only comparing bond asset performance, sovereign bond assets in other major markets have performed poorly under a series of bad news, including rising fiscal deficits in places like France, the hawkish central bank in Japan, and strong performance in emerging market stocks causing bond markets to be continuously overlooked by investors. Rate cut expectations drive US treasury rebound "The Fed is not cutting rates in a strong economy, but in a weakening trend, which should underpin US Treasuries outperforming the market," said Prashant Newnaha, senior interest rate strategist in the Asia-Pacific region at Daiwa Securities in Singapore, with 25 years of experience in bond trading. "In contrast, from Japan to the UK to France, central banks have turned cautious, and a series of issues from fiscal to political are undermining market sentiment for the debts of these developed countries." US Treasuries outperform global peers - investment returns since the beginning of 2025 in local currency terms Expectations around the Fed cutting rates have overshadowed concerns about US Treasuries that prevailed a few months ago. At that time, many Wall Street analysts turned bearish on these sovereign securities due to concerns about the US deficit remaining above 6% of GDP. Although US Treasuries have performed strongly recently, analysts have pointed out a range of negative factors that could further threaten the trajectory of US Treasuries. These factors include President Donald Trump's aggressive tariff policy weakening the US economy and the US assets' "exceptionalism," as well as his criticism of Fed Chair Jerome Powell being seen as undermining the Fed's longstanding monetary policy independence. Currently, the market's main focus is on the pace of the Fed's accommodative policy, with derivative traders generally expecting the Fed to announce three rate cuts of 25 basis points each by the end of this year, with the first expected at the Fed's FOMC monetary policy meeting on Wednesday. The significant cooling in US nonfarm payroll data earlier this month even briefly led traders to speculate on the possibility of a one-time 50-basis-point rate cut this week. Economists at Barclays have adjusted their forecasts, now expecting the Fed to cut rates by 25 basis points three times this year and twice more in 2026, in line with expectations from Wall Street giants like Goldman Sachs. Morgan Stanley and Deutsche Bank's latest forecasts show that the Fed may cut rates by 25 basis points continually in the remaining three meetings of this year (September, October, December), a significant upgrade from the two institutions' previous expectations of rate cuts in September and December only. These adjustments reflect the market shifting its focus from fighting inflation to addressing potential economic slowdown. Since the beginning of this year, the yield on US 10-year Treasury bonds has fallen by about 50 basis points, hovering near its five-month low, with falling yields indicating rising bond prices. In contrast, the yield on French bonds of a similar maturity has risen by nearly 30 basis points, while in Japan it has risen by nearly 50 basis points. According to the spread calculation between the Bloomberg US Treasury Total Return Index and a similar index for non-US global sovereign bonds, the yield advantage of US Treasuries relative to sovereign bonds of other large global markets narrowed to 120 basis points on Monday, significantly lower than over 200 basis points in January. "We see concerns about fiscal and supply tightening from Japan to the UK and France weighing on long-term bond yields," said Andrew Ticehurst, a strategist at Nomura Securities in Sydney. On the other hand, weak US nonfarm payroll data and dovish signals from the Fed "seem to be dominating and boosting US Treasuries," he said in an interview. International investors beware! Weak US dollar dragging down US Treasuries While in local currency terms, US Treasuries have outperformed almost all major financial market competitors this year, the story is different when considering currency fluctuations. The continuous weakness of the US dollar this year has brought additional strong returns to US investors who have shifted part of their funds from US dollar assets to non-US dollar-denominated assets. Based on this calculation (using the US dollar exchange rate as a benchmark), Italian government bonds have been the best-performing major bond market in 2025, with a return of 16%, followed by Spain with 15%. Weak dollar has led US Treasuries to lag behind peers in US dollar-denominated returns - unified year-to-date returns based on US dollar BlackRock, the largest asset management giant in the US, is one of the major investment institutions bullish on sovereign bond investment opportunities beyond US Treasuries. "From a relative value perspective, we currently prefer European and even UK gilt bonds over US Treasury assets," said Simon Blundell, joint head of fundamental fixed income for the EMEA market in London. "In our global mandates and funds, we prefer to hedge our exposure to European assets back to the weak US dollar." However, traders in the market may still see a further increase in US Treasury prices due to clear expectations around a new round of loose Fed monetary policy, which could help some US domestic institutional investors and investors with large US dollar reserves overcome the adverse effects of the weakening dollar. Benoit Anne, senior managing director at MFS Investment Management in London, wrote in a report last week: "There is almost no doubt that the Fed will cut rates this month. Weak US nonfarm payroll data, at least in the short term, helps support the most core reason for being long on US Treasuries."