US Treasuries: 30-year USTs are over 5% - is this an opportunity or a trap?

• Long-end UST yields recently surged, with 30-year yields breaching 5% and reaching 2007-era highs.
• Inflation remains the key driver, led by sticky services inflation and renewed energy-price pressures.
• Breakevens suggest markets expect inflation to remain elevated, which should keep the Fed cautious.
• Fiscal concerns may also keep term premia elevated at the long end.
• We prefer short- to medium-dated USTs for buy-and-hold investors, while long bonds may suit more tactical investors.

US Treasury (UST) yields moved sharply higher in mid-May, with the sell-off most visible at the long end of the curve. 30-year UST yields peaked at around 5.2%, its highest level since 2007; 10-year UST yields also rose to around 4.7% at one point. Although yields have eased slightly, they remain elevated with 30-year UST yields still above 5% (Chart 1).

This move is broadly consistent with our earlier view that the global rates cycle was turning less supportive. In March, we highlighted that a turn in the global interest rates cycle was imminent, while in May, we noted that inflation was likely to rise further in the coming months. In this article, we discuss the key drivers behind the recent UST sell-off, assess the broader macroeconomic backdrop, and elaborate on our recommendations within the UST space.

Chart 1: 30-year UST yields have gone over 5%

30-year USTs reached their highest levels since 2007

The recent spike in UST yields pushed 30-year yields (as of 19 May) to levels not seen since July 2007 (almost 19 years ago). Meanwhile, 10-year yields, at around 4.7%, have not surpassed recent highs, but have moved closer to the 5% psychological level, which was last breached briefly (intra-day) in 2023, and before that, in July 2007.

At face value, long-end yields look attractive relative to the post-GFC era, though we note they do not look particularly extreme when compared against a longer pre-2007 history (Chart 2). This distinction matters because while yield levels are now meaningfully higher than at the start of the year, investors should avoid assuming that current levels automatically represent a ‘peak’ in yields. As macroeconomic conditions would differ significantly between then and now, the key question for investors is whether they are adequately compensated for duration risks in today’s environment.

Chart 2: Yields have climbed significantly, but don’t look particularly extreme vs pre-2007

Inflation concerns dominate the increase in yields

Inflation remains (by far) the primary driver behind the recent increase in long-end yields, especially concerning energy. In the US, headline CPI inflation (y/y) accelerated from February to April, with shelter inflation remaining sticky and energy becoming the latest source of pressure. Despite energy’s small weight in the CPI basket (7%), it still delivered an outsized contribution (1.3 pp) to headline CPI inflation in April (Table 1).

PCE inflation showed a similar trend, with energy pushing inflation up in March. Headline PCE inflation (y/y) also accelerated from February to March, with this acceleration driven mainly by goods inflation, and more specifically, energy inflation. Services inflation also remained elevated. As with CPI inflation, energy contributed a notable 0.5 pp to headline PCE inflation despite its small weight (4%) (Table 2).

Market expectations for inflation, proxied by break-even, remain elevated (Chart 3). For example, 2-year breakevens remain high at around 2.7% - 2.9% over the past week. Meanwhile, 10-year breakevens also rose slightly from 2.26% in end-February to a recent 2.4% - 2.5% range. While markets are not pricing in a severe inflationary episode, these elevated breakevens could keep the Fed cautious.

Table 1: CPI inflation accelerated, with energy delivering an outsized contribution

Table 2: PCE inflation showed a similar trend, with energy also contributing

Chart 3: 2-year inflation breakevens remain elevated

Fiscal concerns lingering in the backdrop

Beyond inflation and Fed expectations, fiscal concerns are likely to remain an important driver of long-dated UST yields. The Congressional Budget Office estimated that the FY26 (ended September 2026) deficit would total $1.9t, or about 5.8% of GDP, higher than the 50-year historical average of 3.8%. Public federal debt also stood at around 101% of GDP.

Importantly, both deficit and debt ratios are projected to worsen (increase) in the coming years. The deficit is forecast to rise to 6.7% of GDP by 2036, while public federal debt is projected to increase to around 120% of GDP. Net interest costs are also becoming an increasingly large part of federal spending, with interest payments expected to account for 15% of outlays in FY26.

To be clear, this does not imply any near-term solvency risk for the US government, especially as the US continues to enjoy its reserve-currency status (for the USD). However, these fiscal concerns may influence the term premium demanded by investors, particularly for longer-dated USTs, and consequently weigh on long-end UST prices.

What does this mean for investors?

Markets have shifted away from the previous ‘rate cuts are coming’ narrative, as we expected. Previously, traders had priced in as many as 3 cuts in 2026. Today, they are now pricing in a decent probability of a rate hike by end-2026, and just over 1 hike by September 2027 (Chart 4). This shift in interest rate expectations has already supported yields, particularly at the short end of the curve and in money market instruments.

This also reinforces our preference for short to medium-dated USTs for the typical buy-and-hold investor. These tenors still offer relatively attractive yields, while carrying lesser duration risk than long-dated USTs. We think this offers a more balanced risk-reward profile, especially if inflation remains sticky and the Fed stays cautious (as we expect).

Longer-dated USTs may still be suitable for traders looking to benefit from price volatility. The additional yield pickup at the long end comes with materially higher sensitivity to inflation, fiscal concerns, and changes in term premia. Effectively, this serves as compensation for these multiple uncertainties. For such traders, heightened uncertainty could bring more volatility, which simultaneously potentially provides more trading opportunities too. As before, we believe investors considering long-duration USTs should have a clear entry and exit framework.

We include a hypothetical scenario analysis below if yields shift by ± 100 bps, for 2-year to 30-year USTs. As expected, investors will earn higher returns if yields fall, and earn lower returns if yields rise. Furthermore, interest rate sensitivity can ramp up significantly for longer-tenor and longer-duration USTs. We highlight that these are purely hypothetical scenarios – investors should consider the likelihood of each event (higher vs lower yields) before investing.

Chart 4: Markets are now expecting rate hikes by the Fed

Table 3: Scenario analysis if yields shift by up to ± 100 bps

Bonds to consider

We have information on many USTs on our platforms, including the 68 (and counting) USTs on our bond marketplace – Bondsupermart Live. Offerings range from those maturing in 2026 to those maturing in 2055. We provide a shortened list below, which should provide an idea of the indicative yields at each respective tenor (Table 4).

Table 4: USTs on our platforms

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in all of the USTs mentioned above. The analyst who produced this report holds NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.