Investors are starting to watch US fiscal policy with the same intensity and sensitivity long reserved for the UK's gilt market, according to Rob Perrone, senior investment specialist at Orbis.
"In the UK, when the government announces fiscal policy, everyone looks at gilt yields, everyone looks at sterling and everyone worries what the scorekeepers will say," he said.
"It wouldn't surprise me if the US ends up like that too before too long."
This observation comes after a volatile few months for US treasuries. 30-year treasury yields touched 5.3% in August - their highest level since 2007 - driven by a cocktail of policy uncertainty, geopolitical risks, fiscal concerns, persistent inflation and surging competition for capital from companies wanting to finance their data centres.
This prompted an announcement from the US Treasury that it would double its buybacks of longer-dated debt, only temporarily stemming concern as yields rebounded within hours. As of 21 September, 10-year treasury bond yields sat just shy of 5% at 4.96%.
The US' climbing debt looms especially large, surpassing $40trn - roughly double where it stood in 2017. This is against a statutory borrowing limit of $41.1trn.
Such a high level of debt requires huge repayments, with federal interest payments costing $970bn in the 2025 fiscal year - 3.15% of GDP.
With the Treasury shifting its focus over to issuing more short-term bills, Perrone pointed out that a greater share of US debt is rolling over every year, so the government's actual borrowing costs will change more rapidly as short-term rates move.
"That will only contribute to more British-style fiscal policy discussions in the US in the years ahead," he predicted.
Damien Hill, fixed income manager at BNY Insight Investment, said that Perrone's assessment is a fair one.
"The US for a long time has got away with having that get-out-of-jail-free card by being the reserve currency of the world and I think there is a school of thought that, over the next several years, that card may not be so easily usable," he said.
"Its debt to GDP is scary and the trajectory isn't great, so I think existing treasury holders may well make adjustments."
If the US market does indeed become more closely scrutinised, Hill said "risk markets had better look out".
Gilts - a lesson from the UK
In particular, Hill warned a shift in perspective can distort the true picture, arguing that sentiment towards the UK sometimes runs more negative than the fundamentals justify. Currently, 10-year gilt yields are higher than treasuries at around 5.23%.
"There has been a tendency since Brexit for people to be overly bearish on the UK's prospects," he said.
"Yet the UK has probably done somewhat better than some of the more bearish market participants and commentators would have suggested."
Beyond concerns over fiscal decision-making, Hill argued that part of the reason gilt yields are more volatile lies in who is buying them, as the ownership share is shifting toward "less sticky" foreign investors and hedge funds and away from institutions.
He added: "If you take the range of 10-year gilt yields as an example and compare against US treasuries this year the yield range has been pretty close - but if you then look at the daily volatility, it's probably getting on for almost double for gilts relative to treasuries on average."
Hill also doesn't believe this higher-beta tag is wholly connected to fiscal deficits or debt to GDP "because the UK looks relatively okay by those measures versus the US".
"The main issue is more the direction of travel for the UK is one of anaemic growth under a Labour government of reasonably big tax spend," he said.
In contrast, US growth remains persistently strong, buoyed by the surge in Al-related spend and investment. But this doesn't erase the country's debt problem.
Avoiding the British narrative
Managing perceptions of US treasuries going forward will likely require the government to display more fiscal discipline, Hill noted, although this is easier said than done.
"If you ultimately just accept higher inflation and go down the QE road of more monetisation of the debt, then potentially there's a narrow path through - but there is a feeling among bond market participants that at some point there is going to have to be a bit of a reckoning, and that may well be caused by real, violent market turmoil, as you cannot keep racking up debt on this trajectory without some serious indigestion," he said.
Fund managers surveyed by the Bank of America in September said the disorderly rise in bond yields is the biggest threat to markets.
Perrone noted that the US is in a difficult spot long-term", with an interest bill making it hard to keep the deficit down. As a result, more debt is required to pay off the interest, meaning the bill spirals.
The long-term solution may be austerity, although he acknowledged this is very "unpalatable" to policymakers "because it gets you thrown out of office".
"So, if you are not prepared to commit to that, what can you do? You can try to hold down bond yields, hold down the government's borrowing costs and inflate away the debt using all sorts of carrots and sticks.”
The silver lining
Despite elevated debt levels on both sides of the pond, Hill argued that bond investors are now much better protected against losses from further yield rises than they were a few years ago thanks to the income cushion built into markets since yields reset higher in 2022.
"The income element in bond markets is really cementing yields and the interest rate sensitivity is at a lower level than what you had before 2022," he said.
Hill explained that this is because older, lower-coupon bonds - whether corporate debt, gilts or treasuries - are steadily being replaced by newer, higher-income issues as they mature.
"So, as an investor, that leaves bond markets with more income, higher yield and lower interest rate sensitivity."
The upshot, according to Hill, is that government bonds now need a much larger yield increase before an investor is left nursing a loss.
That protection cuts both ways, however, as Hill added the same lower sensitivity to rate moves means investors would also see a smaller capital gain than in the past if yields were to fall sharply instead.