LIVE MARKETS-The fiscal fog might be lifting for US Treasuries

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THE FISCAL FOG MIGHT BE LIFTING FOR US TREASURIES

According to the current market narrative, ultra-long U.S. Treasury yields could be headed higher, mostly because investors are getting nervous about the long-term outlook for U.S. sovereign debt.

However, some investors argue the mood has been shifting since early April, when the U.S. tariff announcement sent 10-year yields climbing above 4.5% and 30-year yields past 5% in just a few weeks.

"Despite widespread worries following the passage of the One Big Beautiful Bill Act (OBBBA), the U.S. Treasury market has been notably resilient," Barclays analysts say.

"A combination of higher tariff revenues and lower issuance-weighted Treasury yields has materially improved the debt outlook," they add.

Current fiscal and monetary policy outlooks suggest budget deficits are likely to dip to 5.5-6.0% of GDP, while many had expected a rise to 7-8%, according to Barclays.

The 10-year forward debt-to-GDP ratio is near 116%, compared with the 130% that was looking likely earlier this year.

Trade policy seems to be doing its job. Customs duties have surged to $30 billion a month and look set to rise further, with the effective tariff rate climbing from the current 11%.

"We remain of the view that markets have yet to fully reflect this fiscal shift and maintain our expectation for 30-year yields to decline to 4.5%," Barclays analysts argue.

(Stefano Rebaudo)

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