U.S. Treasuries Break the 5% Barrier, A Seismic Shift in the Global Financial Order Begins
- Gayeon Lim
- Jun 3
- 4 min read
The Magic Number 5% Breaks
Since May 21, the yield on the 30-year U.S. Treasury bond has soared past the symbolic 5% mark and remains elevated, shocking investors (see graph above). This number is significant not just because it surpasses a psychological resistance level, but because it shatters the long-standing market belief in the so-called “5% ceiling” that has dominated the bond market for decades.
On May 22, the spike in yields came immediately after President Donald Trump’s “Big, Beautiful” bill passed the House by a single vote—no coincidence. It signals that investors are fundamentally re-evaluating the U.S. government’s long-term creditworthiness. What’s more concerning: this trend isn’t limited to the U.S. Yields on 30-year government bonds in the U.K., Germany, and Japan are also rising, reflecting a global market searching for a new equilibrium.
The U.S. Shockwave: Shadows from the World’s Largest Economy
Structural Problems of Fiscal Deficit
Even before the budget passed, the U.S. government was borrowing around a staggering $2 trillion annually (6.9% of GDP). This is not a temporary stimulus-related phenomenon but reflects a deepening structural fiscal imbalance. As Trump’s tax cuts take effect, reduced revenues will likely widen the gap even further.
The problem lies in the sheer size of the U.S. economy. With the U.S. accounting for 26% of global GDP, its fiscal policies directly influence the global savings-investment balance. Continued large-scale borrowing by the U.S. raises demand for capital worldwide, inevitably pushing up the cost of capital.
Challenge to Safe-Haven Asset Status
More alarming is the erosion of U.S. Treasuries’ status as the world’s ultimate “safe asset.” Months of chaotic policymaking and President Trump’s destabilizing rhetoric toward existing institutions are making investors question the safety of U.S. debt. Once seen as an unquestionable refuge, Treasuries are now being scrutinized like any other risk-reward asset.
Global Synchronization: Local Stories Behind Rising Yields
U.K.: Inflation Rekindled
The U.K.’s 30-year bond yield surged to 5.5%, the highest since 1998, driven by unexpectedly high inflation. Consumer prices rose 3.5% in April from a year earlier—far above expectations and up from 2.6% the previous month.
This is especially troubling given the U.K.'s structural instability post-Brexit. Mounting inflation pressures are increasing the risk premium on British bonds, while the credibility of the Bank of England’s monetary policy is under strain.
Germany: Virtuous Cycle or Warning Sign?
Germany’s case is more nuanced. Yields on its 30-year bonds rose to 3.1%, approaching levels last seen during the Eurozone crisis. However, this isn’t necessarily bad news. Optimism surged after the German government announced large-scale infrastructure and defense investments in March.
Germany, long criticized for under-spending, is now pursuing proactive fiscal policy. While this is a welcome shift, it could also raise inflation pressure across Europe.
Japan: Dawn of a New Inflation Era
Japan’s case is the most dramatic. On May 21, 30-year yields nearly reached 3.2%, a historic high. A country that spent decades trapped in deflation and near-zero interest rates is now seeing fundamental change. April’s core CPI jumped 3.5% from a year earlier, the fastest pace since the inflation spike of 2022–2023.
This suggests Japan may finally be transitioning into a normal inflationary economy, ending its era of ultra-loose monetary policy. But this transition will come with increased bond market volatility.
Structural Shift: A New Balance of Supply and Demand
Institutional Investor Withdrawal
According to Goldman Sachs, structural demand for long-dated bonds is fading. Traditionally, buyers like defined-benefit pension funds preferred long-term Treasuries to match future liabilities.
However, with yields now high enough to meet cash flow needs, these investors are no longer buying aggressively. Meanwhile, supply continues to grow. Fiscal deficits and central bank bond sell-offs are fueling oversupply in the market.
The Collapse of the 5% Myth
For years, bond traders believed that 30-year yields couldn’t rise significantly above 5% or stay there for long—assuming that institutions like pension funds would jump in at that level. But now, yields have not only broken past 5% but appear to be settling there.
This implies a fundamental shift in market dynamics. The traditional “price discovery” mechanism no longer applies. With large buyers already fully positioned, further fiscal worries could push yields even higher.
Looking Ahead: A New Financial Order Emerging
Short-Term Outlook: Ongoing Volatility
Expect continued volatility in bond markets over the coming months. Fiscal policy in the U.S., inflation trends across major economies, and shifting central bank policies will likely reshape the yield curve itself.
A key point to watch is the unwinding of yield curve inversion—where short-term interest rates exceed long-term rates. As this normalizes, long-term yields are likely to rise further.
Long-Term Outlook: A Paradigm Shift
More fundamentally, the secular decline in interest rates that began in the 1980s may be over. Falling rates for the past 40 years were driven by aging populations, productivity slowdowns, and disinflation from globalization.
But now, those forces are reversing. De-globalization, climate investments, and geopolitical tensions are structurally raising inflation. This suggests that interest rates may settle at higher levels than before.
Policy Implications
Governments must adapt to this shift. Countries with high debt ratios will face greater fiscal pressure as borrowing costs rise. In the U.S., federal interest payments have already surpassed defense spending—$870 billion vs. $822 billion in 2024. Central banks face a dual challenge: taming inflation while preserving financial stability. Volatile bond markets could pose serious risks to banks and pension funds, and must be monitored closely.
Conclusion: Investment Strategies in the Changing World
The current surge in bond yields is not just a market correction—it reflects a structural transformation of the global financial system. Investors can no longer rely solely on past experiences; they must craft new strategies for a new environment.
In terms of portfolio diversification, the traditional stock-bond model may become less effective. In a persistent inflationary climate, greater exposure to real assets and inflation-linked bonds (TIPS) may be warranted.
Most importantly, this may not be a temporary episode. The low-rate, low-inflation world we’ve grown used to might have been the exception, not the rule. Volatility will be inevitable as the market searches for a new equilibrium—but this also opens the door to new opportunities.
In finance, the only constant is change. The rise in bond yields past 5% is just one facet of that change. The key is to read the direction of change correctly and position accordingly. The number 5% may no longer be a ceiling—it could be the new starting point.
Comments