The rise in long-term United States Treasury yields, particularly the 10-year and 30-year bonds, signals a shift in the financial landscape with broad implications for the global economy and for government fiscal policy. While moderate increases in yields can reflect a strengthening economy and rising inflation expectations, sustained and steep increases pose a number of risks.
One of the primary concerns with rising long-term yields is the increased cost of borrowing. Treasury yields serve as a benchmark for a wide range of financial products, including mortgages, car loans, and corporate bonds. Housing, in particular, is sensitive to rate increases, with higher mortgage rates leading to reduced affordability as witnessed here in Australia.
Another major issue with rising Treasury yields is the burden it places on US government finances. The US government relies heavily on debt financing. As yields rise, the cost of servicing existing and new debt grows, potentially leading to higher deficits and increased pressure on fiscal policy. This is especially concerning given the already high national debt levels and the negative fiscal contribution from 'One Big Beautiful Bill' being debated currently in the US.
Rising yields also risk triggering a feedback loop where concerns about debt sustainability push yields even higher. For further reading on this fascinating topic, we encourage you to read our Senior Economist Bob Cunneen's article on US government debt and if there is a crisis looming.
At MLC Asset Management, we believe a carefully selected mix of actively managed Australian and global fixed income and credit strategies can play a vital role in managing portfolio risk and enhancing returns. In today's higher interest rate environment these strategies also present attractive opportunities for income-focused investors. By actively rotating between sectors, selecting securities based on deep analysis and managing both interest rate exposure and yield curve, skilled investors can uncover meaningful opportunities to add value.
How is MLC positioned?
To arrive at a relative position on the yield curve, we must first form a view on the macro environment on the country in which we invest. For the US specifically, we are of the view that broad disinflation will continue, noting the risk of a temporary but limited spike higher in late 2025 driven by higher tariffs. We also believe that lower energy prices and limited pass-through of tariffs on goods will continue to ease inflation pressures toward the Federal Reserve's 2% target, potentially paving the way for more accommodative monetary policy.
Following a recent global research trip, we noted that the labour market and job creation in the US remains solid, driven by private sector activity. We remain alert to potential risks however, with a slight increase in jobless claims. For context, weekly claims for unemployment benefits remained at their highest level in eight months during the first full week of June 2025 while the number of Americans filing for unemployment benefits on an ongoing basis reached the highest level since November 2021.
Our US exposures in fixed income and credit markets are actively managed and maintain a high degree of flexibility. Treasury yields remain volatile, reflecting shifting market expectations around trade tariffs, the approaching US debt ceiling, and ongoing uncertainty over the timing of interest rate cuts from the Federal Reserve throughout 2025.
To manage this volatility and our interest rate exposures, we tactically employ the use of options and interest rate overlays. These instruments enable us to dynamically manage our interest rate exposures in a cost-effective manner for our investors.
Our active position in the US currently sits in the 'belly of the curve' where all-in yields are attractive, but duration risks are lower. We remain underweight the US bond market by 4% with an overall portfolio weighting of 20%.
A comment on Japan's bond market
Yields have also been volatile and risen in Japan; up sharply since the beginning of 2025. This upward trend in ultra long (or 30-year) maturities has concerned investors that it's a sign of wider turmoil in global bond markets. Japanese bonds, traditionally very stable securities, at one point rose 0.90% above their year end (2024) levels peaking at just under 3.20% in May 2025. Given monetary policy uncertainty regarding the Bank of Japan and their future rate of bond purchases, we expect the curve to steepen and therefore retain our short duration position. It is important for investors to note that the Japanese bond market, while large in an absolute sense, holds only a 4% weight in global bond benchmarks.
In summary, we remain constructive on credit and maintain a flexible approach to interest rate exposures. While global growth is slowing, it remains positive, and corporate fundamentals continue to show resilience - supporting our view that income-focused credit strategies remain attractive. On the duration front, we anticipate continued volatility, but see selective value in the mid part of the yield curve, particularly in markets like Japan and the US, where policy shifts and large fiscal deficits are influencing yield dynamics.
Important information
The information in this communication is prepared for licensed Financial Advisers or qualified Wholesale Clients in Australia and not any other persons. By receiving this information, you agree not to distribute the information without our prior written consent.
This communication is provided by IOOF Investment Services Ltd, ABN 80 007 350 405, AFSL 230703 (IISL) as Responsible Entity of the MLC MultiActive (except for MLC MultiActive High Growth and MLC MultiActive Geared), and MLC MultiSeries; MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (MLCI), as Responsible Entity of the MLC MultiActive High Growth, MLC MultiActive Geared, MLC Wholesale Inflation Plus Conservative Portfolio, MLC Wholesale Diversified Debt, MLC Index Plus, MLC Wholesale Horizon and MLC Real Return funds.
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