Thought of the day

US Treasuries fell on Tuesday after data showed the labor market remained resilient. The passage of the One Big Beautiful Bill Act (OBBBA) in the Senate has also put US fiscal worries under the spotlight. The yield on the 10-year Treasury has climbed to 4.28% at the time of writing, around 5 basis points higher than it was early Tuesday.

Job openings in May rose to the highest level since November 2024, according to the latest Job Openings and Labor Turnover Survey, while layoffs have fallen. The quits rate, a key indicator of worker confidence, also edged up from a month earlier. Federal Reserve Chair Jerome Powell on Tuesday reiterated that the US central bank plans to wait for more data before lowering interest rates.

Separately, the version of the OBBBA passed by the Senate overnight would raise the debt ceiling by USD 5tr, more than the USD 4tr approved by the House last month. The bill now goes back to the House for a final vote before US President Donald Trump signs it into law.

But while US deficits are set to increase over the coming years, we do not expect a sustained Treasury sell-off. We believe the recent declines in bond yields will continue over the remainder of the year.

Supply of longer-term Treasuries should stay under control. A key investor concern behind the sharp rise in the long end of the yield curve earlier this year was the prospect of a ballooning supply of long-dated Treasury bonds needed to finance the growing federal debt. But recent auctions have shown a stabilization in investor sentiment. Treasury Secretary Scott Bessent earlier this week also indicated that his department is unlikely to ramp up sales of longer-term securities given where yields are now. Instead, we expect more short-term Treasuries, such as T-bills, will be issued until the Fed resumes policy easing later this year.

The US’s ability to repay its debt remains intact. The outcome of the pending House vote on the OBBBA remains uncertain, though we expect the bill will ultimately pass. Several House Republicans have said they do not support the Senate version, which the nonpartisan Congressional Budget Office estimates will add USD 800bn more to the national debt than the initial House version over the coming decade. But we think the US remains able to manage its debt. The Fed’s credibility, the US dollar’s reserve status, deep and liquid Treasury markets, Fed balance sheet holdings, and bank capital regulations could all help finance the deficit.

Further interest rate cuts should bring yields lower. While job openings rose in May, hiring momentum has slowed, suggesting businesses are cautious about long-term hiring plans as trade and economic headwinds persist. As markets look to the June labor report due tomorrow, we expect payroll growth to slow soon as the impact of policy shifts becomes more apparent. The ISM Manufacturing PMI for June signaled that US factory activity has contracted for a fourth consecutive month. Our base case remains that the Fed would resume easing in September, bringing interest rates 100 basis points lower over the next 12 months as growth slows.

So, we continue to think high-quality government and investment grade corporate bonds offer attractive risk-reward for investors seeking durable portfolio income. Long-term investors can also consider diversified fixed income strategies.