Zhong Tong Finance and Economics App learned that bond fund managers who oversee trillions of dollars in assets are struggling to avoid US government bonds with maturities of 10 years or more, as they generally expect concerns about the US fiscal deficit to trigger cyclical volatility. The price of long-term US bonds (which moves opposite to yield trends), fell sharply this week due to concerns in the market that Trump's focus on loose fiscal policies and trade protectionism could fuel inflation and the scale of the fiscal deficit could worsen.

Bond investors, especially bond fund managers from large institutions, are selling long-term US bonds one after another because they are concerned that Trump's trade and fiscal policies may push inflation and US debt levels higher over time, possibly even immediately after Trump is inaugurated. Trump said in a speech this week that his pro-growth policies will lower interest rates and shrink the deficit. However, many market participants believe that the US fiscal deficit will inevitably continue to deteriorate during Trump's return to the White House or Biden's unexpected re-election period.

According to Polymarket, a platform that predicts U.S. 2024 elections results, Trump's probability of winning the November election surged by more than 10 percentage points after the shooting incident, reaching an astonishing 75%. His rival, Biden's, winning probability plummeted to only around 5%, and Vice President Harris' support rate rose to about 20%, but could not be compared with Trump.

Although yields fell on Thursday due to signs of weak economic activity, bond fund managers at some of the largest asset management firms in the United States expect long-term US bonds to continue to move toward a downward trend because government spending, including debt interest payments, is likely to continue to rise, and the fiscal deficit is expected to widen.

Bond fund managers are cautious about increasing exposure to long-term US bonds, but they remain bullish on short-to-medium term US bonds (mostly concentrating on US bonds with maturities of less than 10 years) in the short term because they expect the Fed's rate cuts to push up the prices of medium-term short-term government bonds, which more directly reflect changes in monetary policy.

"Interest rate fluctuations may continue to rise due to fiscal and other uncertainties. I think this is largely due to uncertainty about debt and deficit supply," said Chitrang Purani, fixed income investment portfolio manager at Capital Group, which manages more than $2 trillion in assets.

Purani said in an interview that he is reducing his purchases of long-term US Treasurys in the investment portfolio he manages, which means he is reducing his holdings of such bonds and is increasing his holdings of medium-term US Treasurys to offset the position.

Other bond fund managers in the market hold similar views. Sara Devereux, global head of fixed income at Vanguard, said she is ready for "several rounds" of government bond spreads, which means the additional compensation investors demand for the risk of holding long-term bonds. If the supply of bonds increases, these bonds may depreciate significantly, meaning that yields will soar.

She said at a webinar this week that these events may be opportunities to buy long-term bonds at a low price. However, she is more inclined to the middle part of the yield curve rather than extending to the 30-year term, because the premium for the 30-year term is particularly tricky.

Statistics from the Commodity Futures Trading Commission (CFTC) show that asset management companies have reached historical highs in long positions with short-term US bond futures with a maturity of 2 years or less this month. On the other hand, their bullish bets on 10-year US Treasury futures fell by about 10% year-on-year.

Investment strategists at BlackRock, the world's largest asset management company with $10.65 trillion in assets, recently stated that they are bearish on long-term US bonds, mainly because the scale of supply may increase due to Trump's expectations of loose fiscal policies, and investors may demand larger-scale compensation for longer-term bonds, which means that premiums for long-term US bond maturities may continue to rise.

On July 1, several days after the Biden-Trump televised debate, the New York Fed's term premium indicator, which measures the premium needed for investors to hold longer-term government bonds, returned to positive for the third time this year.

As economic activity, labor markets, and inflation cool significantly under the impact of rising borrowing costs, the market generally expects the Fed to begin a rate-cutting cycle as early as September, with two rate cuts expected this year, and some traders betting on three rate cuts this year due to unexpectedly weak labor market data. However, the trend of expanding U.S. government deficits has yet to show signs of abating.

The non-partisan Congressional Budget Office (CBO) raised its estimate of cumulative deficits for the 2025-2034 fiscal years to $22.083 trillion last month, up $2.067 trillion from its February estimate. The report said that by 2034, publicly held federal debt could soar from $26 trillion at the beginning of this year to nearly $48 trillion.

The U.S. Treasury Department's next quarterly refinancing announcement is scheduled for July 29.

"Economics, supply, and politics are all factors that promote the decline of long-term U.S. Treasuries, and supply and politics are most closely linked to long-term U.S. Treasuries," said Robert Tipp, Chief Investment Strategist and Global Head of Bonds at PGIM Fixed Income. PGIM Fixed Income manages over $800 billion in assets.

"This is a good strategic point for fixed income assets, as we are past the interest rate hike cycle," Tipp said. "But this will not be a full bond market bull run for long-term U.S. Treasuries with significantly lower yields."