MW 'Misbehaving' U.S. long bonds have this strategist looking for yield elsewhere
By Jules Rimmer
Sticky inflation, unsustainable debt trajectories and demand for capital from AI investment is pushing up longer-term rates, says HSBC
The U.S. Treasury yield curve is steepening, and even though the Fed has started an easing cycle, longer-term rates refuse to go lower.
The "misbehavior of ultra long-term government bonds" is worrying HSBC Asset Management's chief strategist Joe Little.
Central banks have been cutting policy rates relentlessly in the past couple of years, but bond yields, from the tenor of ten years and longer BX:TMUBMUSD30Y, have been either sticky or moving higher regardless, and Little says this is not the norm.
In previous eras, Fed chairmen Alan Greenspan and Ben Bernanke referred to the "bond-yield conundrum," when despite their repeated hiking of interest rates, long-term bond yields kept falling. Now, though, it's the other way round, a situation Little calls the "reverse conundrum".
Little, who oversees strategy for the GBP850 billion HSBC AM manages on behalf of clients, made the comments during a "Top Traders Unplugged" podcast by Alan Dunne on Wednesday.
There are several things that keep him awake at night such as "sticky or spiky inflation" in what he calls the Anglo-Saxon economies (the U.S., the U.K. and Australia, for example), or how a higher cadence of growth globally in 2026 may generate inflation pressure faster than economists anticipate at this stage.
"Inflation seems to have got a bit stuck," he said, noting that after the decade of the 2010s when central bankers were trying to push inflation up towards 2%, this decade has witnessed them struggling to push it back down to that level. Surveying the data, he adds, one could be forgiven for assuming central bankers were targeting 3% inflation not 2%.
What Little calls the "positive policy impulse," stemming from the Trump administration's tax and deregulatory initiatives next year, may partly explain why bond yields are not behaving as markets expect.
Little points to the huge issuance of credit by AI, tech and data center investors that is challenging financing right now, raising the cost of capital, even as the Fed is in the midst of a rate-cutting cycle. However, Little is also very cognizant of government finances being stretched and "debt ratios exploding," with particular emphasis on Japan BX:TMBMKJP-30Y, the U.S. BX:TMUBMUSD30Y, France BX:TMBMKFR-30Y and the U.K. BX:TMBMKGB-30Y in particular.
The stress in bond markets, Little emphasizes, is being felt from ten years and out along the yield curve. Yield curves are steepening (as short term rates fall faster and further than long-term) and rising term premium (whereby investors demand higher returns for the risk of investing over a longer period) are consistent, Little claims. These simply had not been an issue for markets for the last 20 years.
Little thinks the era of the 60/40 stock/bond portfolio weightings may be over because duration (debt with a longer maturity) isn't fulfilling its role like it did in the past.
Concerns about unsustainable government debt burdens in developed markets is persuading Little that emerging market bonds EMB are becoming a more compelling investment case. Their performance in 2025 was certainly helped by dollar weakness enhancing returns, but they exhibit less volatility and have less of an issue with financing mountains of debt. Adding emerging markets debt as a portfolio diversifier then, because developed bond markets are misbehaving, is something HSBC recommends.
-Jules Rimmer
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December 05, 2025 07:28 ET (12:28 GMT)
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