Bond market shifts signal waning US advantage

US exceptionalism is under pressure from fiscal and policy shifts. The US yield curve steepens, mirroring global trends. Investors are urged to diversify as term premiums rise and long-term bond risks and opportunities evolve.

US exceptionalism is based on the belief that the country possesses a unique and enduring global advantage based on its economic scale and dynamism, military strength and geopolitical influence, the depth and breadth of its markets and the dollar's reserve status, and, more recently, outsize fiscal stimulus. This combination of factors contributed to sustained market outperformance across asset classes.

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Is the US term premium exceptional?

While the focus of US exceptionalism is often on stocks, and the profitability of large technology companies in particular, it also applies to US bond markets. The US government bond market is the largest and most liquid in the world, and its yields are the foundation of the global financial system. The US dollar is considered the world's "reserve" currency, while also serving as the basis for trade and transactions globally. These factors confer upon US markets easier - some might say exceptional - access to capital, often at lower rates than would be available otherwise. With recent steepening in the US yield curve we wondered - is the US term premium exceptional too? 

Term Premium Comparison

Term premium is essentially the excess return investors demand to hold bonds over a longer horizon. Term premium will fluctuate based on a variety of factors including macro, policy, and market variables. These include inflation and growth expectations, central bank intervention, fiscal policy and investor sentiment and ultimately, trust. While it is difficult to precisely isolate the term premium itself, a good proxy is the spread between 10- and 30-year maturity bonds across developed markets.

The 10s/30s spread in the US has steepened significantly, from close to zero in mid-2024 to nearly 70 basis points at the end of August 2025 (Figure 1). The majority of this steepening took place starting in February of this year. Investors discounted the potential inflationary impacts of tariffs, along with a ballooning budget deficit requiring more debt issuance, as well as the rising geopolitical and policy uncertainty denting investor sentiment. At first blush this 60 basis point rise would indicate that term premium in the US is, in fact, attractive, and should entice investors to move out the curve to lock in these higher yields for a long period of time.

However, looking across developed bond markets it's clear that a similar pattern has, and continues to, unfold in other countries. Following a period of compressed term premia during and immediately after Covid (2020 - 2021), a hiking cycle drove short and intermediate bond yields higher, compressing the term premium as longer dated bonds remained relatively stable. The US, which had among the highest term premiums during covid, saw its 10-30s spread collapse. While the US has seen this spread widen, the shift is unremarkable - or you might say unexceptional - relative to that of other developed markets. In fact, the rise in term premia across markets really reflects a return to a more normal environment: the average US 10s/30s spread from 2001 - 2019 was 68 basis points.

Threats to US exceptionalism?

US exceptionalism may have peaked, as investors weigh the consequences of new policy initiatives and a bloated fiscal position. The US may lose several key tailwinds that have historically supported its relative earnings, GDP growth, and, by extension, the high valuations of US assets. Much of this shift stems from the fading boost from high fiscal deficits, substantial offshoring and de-globalization, and an era of ultra-low interest rates. Compounding these challenges is a pivot toward a more insular, “America First” global policy stance — one that increasingly positions the US as a less reliable financial, trade, military, and political partner in the eyes of the international community.

Despite these shifts, the US will remain the core allocation for most global investors due to its unmatched liquidity, depth, and current yield advantage. The key theme is diversification, not divestment. Some reallocation is likely, driven by USD hedging preferences, fiscal concerns, and relative value opportunities of other bond markets. Notwithstanding these, we firmly believe that US Treasuries will retain their dominant role in global markets.

Implications for term premium

As US exceptionalism wanes, US term premium could potentially increase further, as investors demand a higher risk premium to fund the country’s deficits at very long maturities. For bond investors this would be driven by increased policy (and institutional) uncertainty, the enormous debt and deficit refinancings required in the medium term, and uncertainly regarding long term inflation expectations. In the near term continued challenges to Fed independence could also undermine investor confidence and trust, thereby driving the term premium higher relative to that of other countries.

Our conclusion? While US term premium today has risen in line with a global trend, it could rise even further, as waning exceptionalism in the more traditional sense creates more uncertainty, driving longer rates higher relative to short rates. The outcome is potentially for a higher clearing level for long bond yields, and thereby a steeper yield curve. With additional uncertainty surrounding monetary policy and the Fed, it will likely be a volatile transition.