In May, the U.S. House of Representatives passed a budget bill projected to increase deficits by trillions over the next 10 years, adding to the U.S. government’s debt. The bill is now with the Senate, where it will likely undergo some changes in the coming weeks and months.
In response to the initial bill U.S. fixed income market volatility increased, particularly on the long end of the curve. The 30-year U.S. bond rose above 5%, and is higher than it started the year, which indicates investors may be demanding a higher premium (i.e. interest rate) on longer-term bonds due to the size of the U.S. debt and deficits. This is not the same for the U.S. 10-year rate, which has fallen since the start of the year:
U.S. 30-year bonds rising above 5% is not a harbinger of bad things to come or even out of the ordinary. Historically, the average U.S. 30-year rate is 5.9%. What is interesting is that the spread (the difference between one interest rate over another) between the 30-year and 10-year yield is rising:
The spread between the two began 2025 around 0.20%, increasing to 0.36% around the initial tariff announcements in April and rising to 0.52% after the spending bill. Policy uncertainty, growing fiscal imbalances, and the prospect of higher inflation have led many investors to shy away from the long-term market: Big Money Managers DoubleLine, Pimco Stay Away From Beaten-Up US 30-Year Bond | Bloomberg We Are Witnessing the Bond Market’s Power to Intimidate | The New York Times
So, the headlines say fixed income managers are staying away from long-term bonds, but there are a few considerations: Who is in the long-term bond market and how big is it?
Owners of long-term bonds are generally institutions, pension funds, and insurance companies, looking to lock in a future return to protect against long-term fixed liabilities. The Federal Reserve (and some foreign central banks) is also in the long-term market, but less so with quantitative easing slowing and their balance sheet shrinking. Mutual funds and investors are also in the market but are more likely to be sensitive to any interest rate or price change because they are looking to maximize their returns.
How large is the long-term debt market? The U.S. government finances its debt by issuing different types of debt:
- Treasury Bills: Maturities less than a year
- Treasury Notes: Maturities between 2 and 10 years
- Treasury Bonds: Maturities of 20 and 30 years
- Treasury Inflation Protected Securities (TIPS): Maturities of 5, 10, or 30 years
- Floating Rate Notes: Maturities of two years
The Treasury then decides how much of each security it would like to issue at auction, and investors bid to set the interest rate. If we look at the number of outstanding U.S. Treasuries, Treasury Bonds (20 and 30 year maturities) make up 17.6% of marketable securities, so the government finances its debt in shorter-term maturities, between 0-10 years. Since the long-term debt market is smaller than the short and intermediate term, investors have a greater ability to influence interest rates.
Overall, long-term U.S. interest rates do matter, as they are a component of financing the U.S. debt and ultimately influence consumer interest rates: higher long-term interest rates may mean U.S. consumers will pay more for mortgages and other loans. The pace of the move higher also matters, as uncertainty increases if interest rates shift higher over a short period of time.
Global Interest Rates: So, if U.S. bond yields are rising, investors must be swapping U.S. bonds and buying foreign bonds, pushing those rates lower, right? Unfortunately, no, as other countries like Japan and the United Kingdom also have fiscal imbalances and concerns about governments’ responses to a trade war. International debt markets are also nowhere near the size of the U.S. Treasury market, so investors are either selling or buying fewer long-term bonds at auction and buying short-term bonds, which carry less risk: Global Bond Markets Signal Governments Must Pay More to Borrow Long-term| Reuters
Fannie Mae and Freddie Mac: On another item around interest rates (if anyone is still reading this), President Trump has signaled he is considering the sale of Fannie Mae and Freddie Mac to boost government revenue. The two quasi-government mortgage entities have been in conservatorship since their 2008 bailout. Both entities are profitable again and hold $7.8 trillion in assets and are required to pay all profits to the government (last year they generated $29 billion in profits). The issue the Trump Administration is considering before taking both entities public is whether they would be no longer backed by the government. Mortgage interest rates may increase as mortgage holders lose the guarantee of being paid back. Trump Team Signals It Wants to Keep Control of Fannie, Freddie to Boost Budget | Bloomberg
Financial Planning/Investment Strategy Corner:
Home ownership, amidst inflation and rising interest rates, has become harder for first-time home buyers since the pandemic. Some expected interest rates to push the price of housing down, but housing affordability has decreased as they have both risen in tandem. Building more starter homes is one consideration where some studies point to the types of homes built post WWII, where 92% were starter homes. The number of starter homes built between 2010 and 2020 was around 25%. Since 2017, the median size of new homes built has been shrinking, but these homes are still expensive. Builders make less money on smaller homes because there are still high costs that don’t go away, like the price of the lot or the permits required to build. While it’s harder than ever before, it is not impossible for first-time home buyers in 2025, but buyers will need to be patient:
- Know what you can comfortably afford for a monthly mortgage payment, including local property taxes.
- Explore any local homebuying programs that may help with down payments, closing costs, or more favorable loan terms.
- Compare and shop around for mortgage rates. Builders may offer incentives or initial interest rates.
What It Really Takes to Buy a Home in 2025: Affordability, Income and Market Challenges | Kiplinger
Quick Hits:
- Zillow may contribute as much to gossip as it does to home buying: Why we’re all addicted to Zillow | The Washington Post
- Multi-tasking has always been a myth to me: The Lost Art of Doing One Thing at a Time | Psychology Today
- As a new father I am trying to pin down my parenting style:
Quote: “People will tell you where they have gone, they’ll tell you where to go, but until you get there for yourself, you never really know.”– Joni Mitchell
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