U.S. Treasury Market Still on a "Roller Coaster" Track
Since entering 2025, the U.S. Treasury market's intense volatility continues. From rapidly expanding government deficits and renewed trade frictions to weak demand from overseas investors, multiple intertwined factors are causing U.S. Treasury yields to fluctuate, leaving investors on edge.
Societe Generale pointed out in its latest report that this "roller coaster ride" in the bond market is likely far from over. The bank believes that at least three key developments could significantly impact the U.S. Treasury market in the coming months, including the emerging variable of "stablecoins," which have gradually started to influence the sovereign bond market in recent years.
Escalating Concerns: Deficit and Inflation Risks Persist
Societe Generale noted that U.S. bond investors are currently in a dilemma. The Trump administration's significant tariff hikes could exacerbate inflation, while the ever-expanding federal fiscal deficit further burdens national debt. These two pressures together drive market expectations for high long-term interest rates.
"In this scenario, unless the government offers more attractive yields, investors may continue to shy away from U.S. Treasuries," the report stated. The bank's analysts believe that the policy path taken by the Trump administration has had a profound impact on the U.S. Treasury market, particularly putting pressure on the long end of the yield curve.
Societe Generale's Focus on Three Potential Risks
According to Societe Generale's analysis, the U.S. Treasury market will face three major risk events in the coming months:
Debt Ceiling and New Debt Issuance
As the Treasury needs to replenish the TGA (Treasury General Account) funds and the Federal Reserve continues quantitative tightening, the U.S. government is expected to issue a significant new round of Treasuries this year. Societe Generale estimates that if Congress raises the debt ceiling as expected in August, the Treasury will accelerate the issuance of nominal coupon bonds until early 2026.
If Congress does not act promptly, the TGA account could run out of cash reserves between September and October this year, posing a risk to fiscal stability.
Weak Demand from Overseas Investors
U.S. Treasuries have long been regarded as "global safe-haven assets," but Societe Generale warns that as inflation remains high and the attractiveness of dollar assets wanes, more overseas central banks and sovereign wealth funds may reduce their allocations to U.S. Treasuries. This demand gap will further drive up the U.S. government's borrowing costs.
The Rise of Stablecoins Affecting Bond Market Structure
Although still an emerging trend, stablecoins (such as USDT, USDC, etc.) are gradually playing a role in cross-border payments and financial flows. Societe Generale believes that if these assets gain wider adoption, they may affect the liquidity structure of the dollar pool, indirectly impacting the pricing mechanism of short-term Treasuries, increasing bond market volatility.
Volatility May Become the Norm
Societe Generale concludes that the U.S. bond market will likely remain in a state of continuous adjustment, and market participants need to prepare for higher volatility. With debt ceiling negotiations, shifts in monetary policy, and rising geopolitical risks, investors should not underestimate the lurking systemic risks.
"When uncertainty becomes the new norm, the bond market will no longer be calm," the bank wrote.
