It’s been a volatile year so far for the bond market, with deficit fears, tariff tantrums, and skittishness about foreign buyers, but there are still fresh developments ahead that could shake things up, Societe Generale said.
Strategists pointed to the handful of fits US bond investors have thrown so far this year, largely stemming from concern about President Donald Trump’s tariff agenda and fears over the rising budget deficit in the US.
The worry is both that tariffs will raise inflation, which will keep interest rates high, and that the national debt is scaling to an unsustainable level. Both possibilities are making investors less willing to hold onto US Treasury bonds unless the government offers more attractive yields.
“The first six months of the Trump administration have rattled bond markets, putting pressure on the long end of yield curves,” strategists wrote in a note on Friday. “A shift away from long bonds and dollar assets could continue, but this will not be a straightforward process.”
Here are three things the bank sees coming next for the bond market.
1. A flood of new bond issuance
The bond market could see a wave of new Treasurys being issued as the government borrows more money and the Fed continues quantitative tightening, a practice that reduces the amount of US government bonds held by the central bank.
Congress is expected to lift the federal debt ceiling sometime in August. Once the ceiling is raised, the Treasury Department will need to build back its account by issuing more nominal coupons, with it likely picking up the pace of issuance by February of next year, SocGen strategists estimated.
If the debt ceiling isn’t lifted, the Treasury General Account could be “totally exhausted” by October, per SocGen’s projection.
SG Cross Asset Research/Rates, Haver
Investors, meanwhile, have appeared more cautious on Treasurys recently. Demand at the most recent 20-year government bond auction was weaker than expected, and foreign participation was the lowest in five years, according to Bank of America.
“Rising debt and QT will continue to flood the markets with bonds,” the SocGen strategists wrote. “There is appetite, but a shift away from long bonds and dollar assets is becoming apparent.”
2. Yields will remain elevated
SocGen fleshed out several scenarios for what could happen to the 2-year and 10-year US Treasury yields over the next four quarters. Here are the bank’s forecasts for the 2-year and 10-year yields by the end of the fourth quarter of 2025:
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Across all scenarios, yields will remain well above where they were five years ago.
3. Crypto could help spur fresh demand for Treasurys
US stablecoins, which are backed by reserves of liquid assets such as short-term Treasurys, could help lift demand for government bonds.
Assets under management by stablecoin issuers are around $234 billion, reflecting a 74% increase from 2023, SocGen said. That number is expected to increase to $2 trillion by the end of 2028, according to an estimate from the Treasury Borrowing Advisory Committee.
Stablecoins were also the third-largest buyer of US T-bills in 2024, behind JPMorgan’s government money market fund and China.
SocGen/Bank of International Settlements
“A plausible, though highly uncertain, scenario is for stablecoins to absorb approximately 20% of expected net bill issuance over the next three years,” SocGen strategists said.
In a previous note, Bank of America estimated that each $1 vested in stablecoins by traditional banks could represent $0.90 in additional demand for US Treasurys. The bank said demand from stablecoin issuers could be a future source of volatility for the Treasury market.
