Equity markets have made a remarkable recovery following a turbulent start to the second quarter, with the S&P 500^® closing out May up 6%. However, ongoing uncertainties surrounding tariffs and their inflationary impact, concerns about the fiscal deficit and potential shifts in foreign demand for U.S. Treasuries have weighed on the bond market, with the iBoxx $ Treasuries down 1% in May—marking its first monthly loss this year.

Despite declines across the yield curve on June 4, 2025, following a soft labor market report, 2-Year and 30-Year U.S. Treasury yields have surged by over 23 and 27 bps,¹ respectively, since the end of April, with the 30-Year Treasury yield briefly surpassing 5% following weak demand in the 20-Year U.S. Treasury auction. As a result, the spread between short- and long-term U.S. Treasury yields has widened, suggesting that investors may be demanding greater compensation for holding longer-term debt. Exhibit 1 highlights the spread between 2-Year and 30-Year U.S. Treasury yields, which has increased to over 100 bps, reaching levels not seen since 2022.

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Rising yields also may affect the potential for diversification across asset classes. Traditionally, bonds have tended to exhibit an inverse correlation to equities, with notable outliers such as most of 2024. However, after witnessing negative correlations so far this year, Exhibit 2 reveals that the six-month correlations between The 500™ and the S&P U.S. Treasury Bond Current 30-Year Index have turned positive. If sustained, a positive relationship could be indicative of a potential headwind for risk-adjusted performance for combinations of both asset classes.

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In addition to their impact on diversification, we can also examine the currency dynamics associated with an increase in bond yields, which could be particularly relevant for global asset owners who may be affected by currency hedging decisions. Notably, despite the rise in long-term U.S. Treasury yields, the U.S. dollar has weakened, with the S&P U.S. Dollar Futures Index down 4% quarter-to-date. Although the dollar stabilized in May, the currency’s weakness coinciding with rising bonds yields marks a departure from their typical positive relationship, as shown in Exhibit 3. Recent risks, including fiscal concerns and doubts about the dollar’s safe haven status, may have contributed to this diverging trend.

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While the future trajectory of U.S. Treasury yields remains uncertain, we can look to market expectations for long-dated U.S. Treasury volatility, as measured by the options market with the Cboe 20+ Year Treasury Bond ETF Volatility Index (VXTLT). After declining from the highs observed during the market turbulence in April, Exhibit 4 shows that VXTLT rose along with longer-dated yields, surpassing the 20 mark on May 21, 2025, and closed above the 17 handle as of June 4.

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Looking ahead, although numerous unknowns remain, the impact of U.S. Treasury yields on the term premium, along with the associated diversification and currency dynamics, could have significant implications for asset owners across asset classes.

¹ Data as of June 4, 2025.

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