Investors are increasingly betting on higher long-term U.S. Treasury yields, due to growing concerns over the nation’s rising debt and widening fiscal deficits. The risks have been amplified by President Donald Trump’s proposed tax cuts, which are expected to further widen the fiscal gap.
Surge in Treasury Options Activity Reflects Bearish Sentiment
A spike in hedging activity is evident in Treasury options markets, with many investors targeting higher yields on longer-dated bonds by year-end. Open interest data from CME on Monday revealed a sizable bet on the 10-year yield approaching 5%—a move that cost $11 million in premium, as quoted on Bloomberg.
Wall Street Forecasts More Upside in Yields
Major banks, including Goldman Sachs and JPMorgan, are raising their long-term yield projections, as quoted on Bloomberg. JPMorgan strategists, Jay Barry and Jason Hunter, noted that current trade and monetary policy uncertainty—combined with changing global demand for U.S. debt—skews risks toward a bearish steepening of the yield curve.
Credit Downgrade Adds Pressure to Long-Term Yields
The 30-year Treasury yield briefly topped the 5% mark earlier this week, the highest since November 2023 (per Bloomberg), following Moody’s downgrade of the U.S. credit rating from Aaa to Aa1 (read: ETF Strategies to Follow on Moody's Downgrade of U.S. Debt).
Moody’s downgrade, along with Trump’s tax plan—expected to raise the debt ceiling by $4 trillion—has reignited the “sell America” narrative. Citi analysts warned that reduced tariff revenues have narrowed the government’s “fiscal space”, constricting its ability to fund new ventures.
Treasury Curve Steepening on Fiscal Uncertainty
The U.S. Treasury curve has steepened markedly, but not due to growth optimism, but rising worries over long-term borrowing costs and deficit sustainability. While short-term yields remain stable, long-end yields—like the 10-year and 30-year—have climbed as investors demand greater term premiums for holding longer maturities.
BNP Paribas analysts suggested that a U.S. recession, coupled with constrained fiscal responses due to debt sustainability concerns, could lead to a deeper and longer downturn than past cycles, as quoted on Yahoo Finance.
ETF Investment Strategies
Given this volatile fiscal backdrop and market response, here are a few exchange-traded fund (ETF) strategies for investors:
Demand Grows for Downside Protection in Treasury Markets
Traders are increasingly paying premiums to hedge against further losses on long-term bonds. Puts protecting against higher yields are commanding the highest premiums since April, when Trump’s aggressive trade stance rattled markets. Bet on inverse bond ETFs like ProShares UltraShort 20+ Year Treasury TBT. The ETF gained 1.7% on May 20, 2025.