US Policy Support Fails to Curb Rising Bond Yields

The US administration is taking steps to contain long-term Treasury yields, which have been rising due to concerns about government financing and the impact of the AI investment boom on borrowing costs. According to BofA Securities, a fresh round of policy support aimed at capping bond yields is likely to prevent further sharp rises in borrowing costs. However, if policymakers fail to pull the 30-year Treasury yield below the critical 5 per cent level, markets could face a weaker US dollar and a shift away from leveraged risk assets.

The US Treasury has doubled the size of its long-end bond buybacks as part of these efforts, following earlier measures such as dollar swap lines with Asian and Gulf economies and intervention to support the yen. BofA described these steps as a growing policy effort to 'fix' the fixed-income market, arguing that they should cap, but not necessarily reduce, US bond yields.

The investment bank also highlighted growing signs of investor optimism, citing its Bull & Bear Indicator rising to 9.5 from 9.3 and entering an 'extreme bull' territory. However, BofA cautioned that if fresh monetary and fiscal support fails to contain long-term yields, the resulting policy credibility shock could trigger a US dollar slump and broader risk-off positioning.