US bonds are flashing a warning

Key points

• Rising yields send warnings with the dollar falling: Investors are demanding a fiscal risk premium, not pricing in growth.

• Global markets are outperforming: Europe and China are seeing inflows as confidence in U.S. assets wanes.

• Diversification is critical: Both across geographies and asset classes, especially with policy uncertainty, structural deficits, and the potential political volatility ahead.

The bond market is sending out distress flares. Yields are climbing—but instead of strengthening the U.S. dollar, they are coinciding with a weaker USD. For investors, this isn’t a vote of confidence in U.S. growth. It’s a sign that something may be breaking beneath the surface.

The scoreboard tells the story

While the S&P 500 is down slightly this year, other global markets have surged:

• S&P 500: -0.6% YTD.

• Germany’s DAX: +21% YTD.

• Hong Kong’s Hang Seng Index: +18% YTD.

Capital is moving—quietly but clearly—toward markets with attractive valuations and supportive policy backdrops.

What’s driving the disconnect?

• Fiscal risk premium: Investors are starting to demand more compensation for holding U.S. Treasuries. With deficits ballooning and political uncertainty rising, higher yields may not reflect optimism—but concern.

• Diminished confidence in U.S. assets: In a typical cycle, higher yields draw in foreign buyers. But if the USD is falling despite those yields, it could signal that investors are starting to look elsewhere—questioning U.S. exceptionalism.

• Repricing of Fed expectations: Markets may be anticipating rate cuts as economic momentum fades, but long-end yields are rising due to sticky inflation or supply concerns. That’s a bearish steepening—not the kind that fuels rallies.

What it means for investors?

This combination suggests a fragile market regime—where nominal returns may look attractive, but real risks are rising. This is a time to be selective and strategic:

• In the U.S., focus on quality—names with pricing power, healthy balance sheets, and global exposure.

• Rebalance towards global equities and emerging markets where the policy cycle is more supportive.

• Consider exposure to sectors benefiting from stimulus tailwinds in Europe and China

• Consider currency diversification as the USD weakens and FX volatility rises

• Gold deserves a second look—while higher yields often weigh on gold, this time it’s being supported by central bank buying, fiscal risks and a desire for stability.

Markets are shifting. It’s not just about chasing yield—but understanding what that yield is really telling us.

Read the original analysis: US bonds are flashing a warning