ROI-Surprise asset of the year? The 30-year US Treasury bond: McGeever

By Jamie McGeever

ORLANDO, Florida, Dec 22 (Reuters) - The financial asset of 2025 is the 30-year U.S. Treasury bond.

True, it hasn't come close to matching the eye-popping gains of artificial intelligence-related stocks or gold. In fact, its price hasn't risen at all this year. But given what it has faced in the past 12 months, it should have been clobbered. Yet at the time of writing, it is on course to end the year where it started - ?and that alone is remarkable.

If you were told on January 1 that gold would rocket nearly 70% through $4,000 an ounce, Wall Street would experience the biggest tech boom in a quarter of a century and financial conditions would ?be the loosest in three years, you might expect long-dated bond yields to rise.

And what if you were also told that U.S. inflation would remain above ?target for another year, the dollar would slump 10%, the U.S. "term premium" would rise to its highest in over ?a decade, and the once-sacrosanct notion of central ?bank independence would be shattered by the Trump administration's persistent attacks on the Federal Reserve?

If that's not enough, President Donald Trump's "One Big Beautiful Bill" is set to add trillions to the budget deficit over the next ?decade, fuelling the "dollar debasement" trade.

Despite all that, the 30-year yield is around 4.8%, pretty much ?where it started the year.

INVESTORS LIKE 5%

The 30-year yield has moved in the interim, of course. Granted, the Fed's 75 basis points of rate cuts this year might have been expected to lower longer-dated yields - the 10-year yield is down nearly 50 bps. But equally, ?cutting rates with inflation persistently and comfortably above target is always liable to limit ?the downside for ultra-long ?yields.

Yield curves have steepened - the 2s/30s curve is the steepest in four years - but that is almost entirely due to moves at the front end.

And relative to its international peers, the U.S. long bond performed well this year, although that shine is dulled in currency-adjusted terms by the ?dollar's 10% decline.

Germany's 30-year bund yield recently hit its highest since 2011, and is up almost 100 bps this year, while the 30-year Japanese government bond yield has never been higher and is up more than 100 bps this year.

What explains this relative strength? A yield of 5% for what is, despite all the macro noise, still considered one of the safest and most liquid long-dated assets in the world, is clearly attractive to many investors. Demand from "real money" buyers such as pension funds, mutual funds and insurance companies, who need to match their long-term liabilities with long-term assets, has been consistently strong.

DURATION VEXATION

That demand ensured the U.S. Treasury's 12 auctions of 30-year ?bonds this year ?generally passed off without incident.

Treasury sold $276 billion of debt in total, one in each calendar month. The average bid-to-cover ratio over the 12 sales, a measure of demand, was 2.37. That's pretty close to the average of around 2.38 over the past 50 auctions going back to November ?2021, according to Exante Data.

Domestic institutional investment funds took up around 70-75% of those bonds on the block, and foreign investors increased their purchases in the second half of the year, taking more than 15% in November for the first time since early last year.

On the other hand, Treasury paid lower yields than prevailing pre-sale market levels on the day in only three of these auctions, and higher yields in six. Investors generally demanded a premium for buying at auction.

But as hardy as the U.S. long bond has been this year, it faces daunting challenges next year. The global backdrop for fixed income duration remains a tough one - risk premia, inflation risks and debt supply are all rising, doubts about the AI productivity story continue to gnaw, ?and Fed independence concerns are mounting.

So the 30-year bond will face similar challenges to those it saw in 2025, only likely more severe this time around. Its resilience may now truly be put to the test.

(The opinions expressed here are those of the author, a columnist for Reuters)

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(By Jamie McGeever; Editing by Marguerita Choy)