Deglobalization's Threat to the Bond Market: Navigating the Storm of Rising Yields and Fiscal Uncertainty

The era of U.S. Treasuries as the ultimate safe haven is fading. A confluence of fiscal recklessness, geopolitical fragmentation, and technological disruption has created a new reality: investors can no longer rely on the world’s largest bond market to shield them from turmoil. As yields surge and deglobalization accelerates, the writing is on the wall—diversification is no longer optional. Here’s how to position for the next phase.

The Fiscal Crisis: When Downgrades Fail to Scare Markets

The U.S. government’s creditworthiness has hit a historic low. In April 2025, Moody’s downgraded U.S. debt to Aa1, joining S&P and Fitch, which had done so earlier. Yet markets yawned. The 30-year Treasury yield briefly spiked above 5% on May 19 but retreated as traders bet the Federal Reserve would cut rates just once this year—half the expected pace in early 2024.

This disconnect masks deeper risks. The U.S. fiscal deficit now sits at 6.5%-7.0% of GDP, a level once reserved for recessions. Post-pandemic spending, entitlements for an aging population, and the costs of reshoring supply chains are creating a fiscal time bomb. Moody’s warned this “structural erosion” could lead to further downgrades if Congress fails to act—a near impossibility in a politically divided landscape.

Deglobalization’s Debt Bomb

The “reciprocal tariffs” imposed by the Trump administration in April 2025 exemplify how deglobalization is reshaping capital flows. While scaled back, these policies have reignited trade wars with China, raising borrowing costs for corporations and governments alike. Meanwhile, the U.S. dollar’s reserve status is under siege.

Europe is no longer waiting for Washington to fix its fiscal mess. Germany’s €500 billion infrastructure-and-climate fund, exempting defense spending from debt limits, promises to lift GDP by 1-2% from 2026. This bold fiscal expansion is diverting capital from U.S. bonds to bunds and gilts.

China, too, is playing its hand. Despite ongoing tensions, its reliance on U.S. markets persists—but not for long. A RMB400 billion AI investment push and the rise of open-source models like DeepSeek’s are fueling a tech-driven growth spurt. This could reduce China’s need to export to the U.S., accelerating deglobalization.

The Bond Market’s New Rules: Exit Treasuries, Enter Opportunities

The era of “buy and hold” Treasuries is over. Investors must now navigate a world where:
1. Yields stay volatile: The Fed’s lone rate cut in 2025 won’t calm markets. Reshored supply chains and AI-driven productivity gains could push the neutral rate higher, keeping real yields elevated.
2. Credit spreads are tightening—until they aren’t: U.S. corporate bonds remain vulnerable to recession fears. Look instead to Asia’s high-yield bonds (excluding China’s property sector), which offer 6-8% yields with improving liquidity.
3. Dollar dominance is wobbly: The euro and yen are gaining ground.

Strategic Moves for the Brave

1. Rotate into bunds and gilts: Germany’s growth story and subdued inflation make bunds a safer haven. The Bank of England’s potential rate cuts also favor gilts.
2. Leverage mortgage-backed securities (MBS): U.S. MBS offer 5-6% yields, insulated from Treasury volatility due to prepayment protections.
3. Hoard gold: Central banks in the Global South are diversifying reserves, and China’s M2 growth could reignite global liquidity.

The Bottom Line: Adapt or Be Left Behind

The myth of U.S. Treasury safety is crumbling. Fiscal profligacy, deglobalization, and geopolitical shifts are rewriting the rules of bond investing. The path forward is clear: diversify geographically, embrace structural growth themes (like AI), and prepare for a world where “risk-free” assets no longer exist.

The storm is here. Now is the time to act.