Despite a dovish Federal Reserve pivot, long-dated U.S. Treasury yields have surged, defying historical patterns and prompting strategic reassessment among investors. HSBC’s fixed-income strategist flags the anomaly as a critical market inflection point.
- 30-year U.S. Treasury yield rose to 5.1% in late 2024, up 40 bps from January levels
- Breakeven inflation rate reached 2.37%, the highest since early 2023
- Federal Reserve initiated three rate cuts starting July 2024
- HSBC adjusting strategy toward shorter-duration sovereign and corporate debt
- S&P 500 forward P/E ratio dropped to 17.5, lowest since mid-2023
- Investors increasingly favor near-term earnings over long-term growth assumptions
Long-term U.S. Treasury yields have climbed sharply in late 2024, with the 30-year bond yield rising above 5.1%—a level not seen since mid-2023—amid the Federal Reserve’s ongoing rate-cutting cycle. This reversal has puzzled analysts, particularly given that historically, falling short-term rates have led to lower long-term yields through reduced inflation expectations and increased demand for duration. Yet, despite three consecutive rate cuts starting in July 2024, long-term yields have increased by over 40 basis points on average since January. The divergence underscores growing concerns about fiscal sustainability and persistent inflation pressures, even as core PCE inflation remains above 2.8%. Market participants are pricing in a higher probability of sustained elevated yields, with breakeven inflation spreads widening to 2.37%—the highest since early 2023. These signals suggest bond investors are prioritizing real return protection and credit risk premiums over traditional duration plays. As a result, HSBC’s global fixed-income strategist is shifting allocation toward shorter-duration sovereigns and high-quality corporate debt, particularly in investment-grade sectors with maturities under five years. The firm has also increased exposure to non-U.S. government bonds, including German bunds and Japanese JGBs, where real yields remain more favorable relative to inflation risks. This move reflects a broader recalibration in asset allocation strategies across major institutional portfolios. The re-pricing of long-term risk has ripple effects across equity markets, especially in interest-rate-sensitive sectors like real estate and utilities. Equity valuations tied to long-term cash flows have seen downward revisions, with the S&P 500’s forward P/E ratio dropping below 17.5, its lowest since mid-2023. Investors are now demanding higher risk-adjusted returns, favoring near-term earnings growth over speculative future performance.