U.S. Treasuries have been the outperformers among major sovereign bond markets this year, as the prospect of another round of interest rate cuts by the Federal Reserve has completely reversed the market's generally bearish view on U.S. bonds.



According to Bloomberg index data, U.S. Treasuries are expected to achieve a 5.8% return in 2025, leading the world's 15 major local currency bond markets. The additional yield on U.S. Treasuries relative to their global counterparts has fallen to a three-year low, confirming the strength of this rally.

The weak dollar cannot hide the edge of US debt, and sovereign bonds of many countries are facing headwinds

While a weak dollar has boosted returns on overseas assets relative to U.S. Treasuries, excluding exchange rate factors, sovereign debt in other major markets has underperformed amidst multiple headwinds. France's widening fiscal deficit and the Bank of Japan's hawkish stance have weighed on local bond markets.

" The Fed cut rates when the economy was weak, and that became the basis for Treasury bonds to outperform other assets ," said Prashant Newnaha, senior strategist at TD Securities.

The prospect of a Fed rate cut has completely offset the concerns that gripped markets a few months ago, when the U.S. fiscal deficit continued to exceed the warning line of 6% of GDP, prompting analysts to be bearish on U.S. bonds.

Interest rate swap traders are now pricing in nearly three 25 basis point rate cuts by the end of the year, with the first expected at this week’s Fed meeting. Weak jobs data had even led markets to anticipate a 50 basis point rate cut this week.

Political wrangling continues as court ruling upholds Fed independence

The standoff between the Trump administration and the Federal Reserve escalated further at the start of this week, with an appeals court temporarily blocking the removal of Fed Governor Tim Cook.

The Senate also confirmed Trump economic adviser Stephen Milan to his seat.

These political factors had previously raised market concerns about the Fed's independence, but have now clearly been offset by expectations of rate cuts .

Yield advantage narrows but still leads major markets

The U.S. 10-year Treasury yield has fallen about 50 basis points this year and is currently hovering near a five-month low. By comparison, it is up nearly 30 basis points in France and nearly 50 basis points in Japan.

Although the yield advantage of US Treasuries over global sovereign bonds has narrowed from 200 basis points in January to 120 basis points, it is still at a significant level .

Taking foreign exchange fluctuations into account, the investment landscape presents a different picture. The weakening of the US dollar this year has brought additional returns to investors investing in non-US dollar assets .

By this measure, Italian bonds were the best-performing major bond market, with a return of 16%, followed by Spain at 15%.

Institutions such as BlackRock are beginning to be optimistic about investment opportunities beyond government bonds. Simon Blundell, the firm's head of European fixed income, said: "We prefer the European bond market and even the UK gilt market."

However, a new round of easing policies by the Federal Reserve may push U.S. Treasuries to rise further. MFS Investment Management pointed out that the weak employment data "provides support for going long on U.S. long-term bonds."