Anxiety about escalating U.S. debt and inflation sparks sell-off of long-term bond investments
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Bond investors are ditching long-term U.S. debt holdings at an accelerated pace, last observed during the peak of the 2020 pandemic, as escalating American debt and uncertainty inflate the risks of this market.
As of the second quarter, long-term U.S. bond funds, encompassing both government and corporate debt, have witnessed a net withdrawal of nearly $11 billion, as calculated by Financial Times based on EPFR data. This second-quarter exit is on course to surpass the tumultuous first quarter of 2020, symbolizing a dramatic shift from the usual twelve-quarter inflows of about $20 billion.
Long-term bond funds' redemptions, commonly popular among institutional investors, coincide with mounting turmoil over America's fiscal destiny. Fund flows serve as a barometer for investor sentiment, even though they only represent a fraction of the titanic U.S. bond market.
Bill Campbell, a bond specialist at DoubleLine, commented, "It's a symptom of a much bigger problem. There's a lot of concern domestically and from the foreign investor community about owning the long end of the Treasury curve."
Trump's proposed tax bill, currently under debate in Congress, is predicted by independent analysts to swell U.S. debt by trillions of dollars in the coming decade, necessitating huge bond sales. The White House counters that tariffs and robust growth will counterbalance the debt.
Meanwhile, market players brace themselves for escalating inflation due to impending tariffs on key trading partners, one of the arch enemies for bond investors.
Goldman Sachs' Lotfi Karoui stated, "The outflow reflects concerns over the longer-run outlook for fiscal sustainability." Robert Tipp, head of global bonds at PGIM, added, "This is creating a skittishness about the long end of the yield curve, and a general uneasiness."
Long-term bonds are particularly sensitive to inflation, since rising prices erode the value of extended interest payments.
The market volatility has also been evidenced in the performance of long-term U.S. debt, which has declined by about 1% in the second quarter, recovering from steeper losses post-Trump's April tariff announcements.
While short-term bond funds continue to attract money—with investments reaching over $39 billion during the second quarter—longer-term strategies remain in the crosshairs of investors. Fund managers might find solace in diversifying their bond portfolios abroad, yet they may still perceive the Treasury market as a vital piece of their global fixed income investments.
However, Andrzej Skiba, head of BlueBay US fixed income at RBC Global Asset Management, cautioned, "Even though we don't see an earthquake coming, you could see tremors."
Relevant Facts & Investigations
- Growing Debt and Deficits: Analysts estimate the U.S. budget deficit to expand by approximately $3 to $4 trillion over the next decade, pushing the debt-to-GDP ratio to record highs, causing concerns about the debt’s long-term sustainability.
- Recent Credit Downgrade: Moody's Investors Service downgraded U.S. debt from Aaa to Aa1 in May 2025, reflecting worry over fiscal policy and management.
- Tax Bill Implications: The proposed U.S. tax bill, if passed, could accelerate the federal deficit, adding uncertainty to the market.
- Policy Uncertainty: Ongoing debates on tariffs, fiscal policy, and spending create a sense of unpredictability and increase market volatility.
- Term Premium: The rising term premium—the additional yield investors demand for holding long-term bonds—contributes significantly to the uptick in 10-year Treasury yields, reflecting concerns about future U.S. economic and policy conditions.
- The massive net withdrawal from long-term U.S. bond funds, amounting to nearly $11 billion in Q2, mirrors the 2020 pandemic peak, demonstrating a shift from typical inflows of about $20 billion over twelve quarters.
- Market players, including Goldman Sachs' Lotfi Karoui and PGIM's Robert Tipp, attribute this outflow to concerns over the long-term fiscal sustainability of the U.S.
- The proposed tax bill, predicted to swell U.S. debt by trillions in the coming decade, fuels these concerns and contributes to an unstable market environment.
- With the increasing risks of inflation due to impending tariffs and mounting policy uncertainty, investors seek refuge in diversifying their bond portfolios abroad while still considering the Treasury market a crucial component of their global fixed income ventures.
