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ETF Strategies to Follow Wall Street Forecasts Higher Bond Yields
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Investors are increasingly betting on higher long-term U.S. Treasury yields, due to growing concerns over the nation’s rising debt and widening fiscal deficits. The risks have been amplified by President Donald Trump’s proposed tax cuts, which are expected to further widen the fiscal gap.
Surge in Treasury Options Activity Reflects Bearish Sentiment
A spike in hedging activity is evident in Treasury options markets, with many investors targeting higher yields on longer-dated bonds by year-end. Open interest data from CME on Monday revealed a sizable bet on the 10-year yield approaching 5%—a move that cost $11 million in premium, as quoted on Bloomberg.
Wall Street Forecasts More Upside in Yields
Major banks, including Goldman Sachs and JPMorgan, are raising their long-term yield projections, as quoted on Bloomberg. JPMorgan strategists, Jay Barry and Jason Hunter, noted that current trade and monetary policy uncertainty—combined with changing global demand for U.S. debt—skews risks toward a bearish steepening of the yield curve.
Credit Downgrade Adds Pressure to Long-Term Yields
The 30-year Treasury yield briefly topped the 5% mark earlier this week, the highest since November 2023 (per Bloomberg), following Moody’s downgrade of the U.S. credit rating from Aaa to Aa1 (read: ETF Strategies to Follow on Moody's Downgrade of U.S. Debt).
Moody’s downgrade, along with Trump’s tax plan—expected to raise the debt ceiling by $4 trillion—has reignited the “sell America” narrative. Citi analysts warned that reduced tariff revenues have narrowed the government’s “fiscal space”, constricting its ability to fund new ventures.
Treasury Curve Steepening on Fiscal Uncertainty
The U.S. Treasury curve has steepened markedly, but not due to growth optimism, but rising worries over long-term borrowing costs and deficit sustainability. While short-term yields remain stable, long-end yields—like the 10-year and 30-year—have climbed as investors demand greater term premiums for holding longer maturities.
BNP Paribas analysts suggested that a U.S. recession, coupled with constrained fiscal responses due to debt sustainability concerns, could lead to a deeper and longer downturn than past cycles, as quoted on Yahoo Finance.
ETF Investment Strategies
Given this volatile fiscal backdrop and market response, here are a few exchange-traded fund (ETF) strategies for investors:
Demand Grows for Downside Protection in Treasury Markets
Traders are increasingly paying premiums to hedge against further losses on long-term bonds. Puts protecting against higher yields are commanding the highest premiums since April, when Trump’s aggressive trade stance rattled markets. Bet on inverse bond ETFs like ProShares UltraShort 20+ Year Treasury (TBT - Free Report) . The ETF gained 1.7% on May 20, 2025.
Investors Eye Alternatives to U.S. Assets
With long-term yields rising and policy uncertainty mounting, global investors may increasingly look elsewhere. Investors can try Europe ETFs like Vanguard European Stock Index Fund ETF (VGK - Free Report) . Europe ETFs have outperformed the S&P 500 this year due to cheaper valuation, upbeat economic growth, more sustainable earnings pattern, less tech exposure, and cooling inflation.
Try Short-Term U.S. Treasury ETFs
The iShares 0-3 Month Treasury Bond ETF (SGOV - Free Report) offers low interest rate and default risk. Moreover, with the Fed being less dovish, these short-term funds are providing attractive yields. SGOV currently yields 4.70% annually and charges a low expense ratio of just 9 basis points. The fund is up 0.1% over the past week (as of May 20, 2025).
Hedge Rising Rates With Niche ETFs
There are some niche ETFs that guard against rising rates. These ETF options are: Simplify Interest Rate Hedge ETF (PFIX - Free Report) , Global X Interest Rate Hedge ETF (RATE - Free Report) and Foliobeyond Rising Rates ETF (RISR - Free Report) . These ETFs gained 1.9%, 1% and 0.7% on May 20, respectively.
Emerging Market Bond ETFs: Another Investing Option
Emerging market bonds are higher-yielding, but come with higher risk. The ETF (EMB - Free Report) yields 5.26% annually. The ETF has gained about 3% past month and 0.2% past week.
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ETF Strategies to Follow Wall Street Forecasts Higher Bond Yields
Investors are increasingly betting on higher long-term U.S. Treasury yields, due to growing concerns over the nation’s rising debt and widening fiscal deficits. The risks have been amplified by President Donald Trump’s proposed tax cuts, which are expected to further widen the fiscal gap.
Surge in Treasury Options Activity Reflects Bearish Sentiment
A spike in hedging activity is evident in Treasury options markets, with many investors targeting higher yields on longer-dated bonds by year-end. Open interest data from CME on Monday revealed a sizable bet on the 10-year yield approaching 5%—a move that cost $11 million in premium, as quoted on Bloomberg.
Wall Street Forecasts More Upside in Yields
Major banks, including Goldman Sachs and JPMorgan, are raising their long-term yield projections, as quoted on Bloomberg. JPMorgan strategists, Jay Barry and Jason Hunter, noted that current trade and monetary policy uncertainty—combined with changing global demand for U.S. debt—skews risks toward a bearish steepening of the yield curve.
Credit Downgrade Adds Pressure to Long-Term Yields
The 30-year Treasury yield briefly topped the 5% mark earlier this week, the highest since November 2023 (per Bloomberg), following Moody’s downgrade of the U.S. credit rating from Aaa to Aa1 (read: ETF Strategies to Follow on Moody's Downgrade of U.S. Debt).
Moody’s downgrade, along with Trump’s tax plan—expected to raise the debt ceiling by $4 trillion—has reignited the “sell America” narrative. Citi analysts warned that reduced tariff revenues have narrowed the government’s “fiscal space”, constricting its ability to fund new ventures.
Treasury Curve Steepening on Fiscal Uncertainty
The U.S. Treasury curve has steepened markedly, but not due to growth optimism, but rising worries over long-term borrowing costs and deficit sustainability. While short-term yields remain stable, long-end yields—like the 10-year and 30-year—have climbed as investors demand greater term premiums for holding longer maturities.
BNP Paribas analysts suggested that a U.S. recession, coupled with constrained fiscal responses due to debt sustainability concerns, could lead to a deeper and longer downturn than past cycles, as quoted on Yahoo Finance.
ETF Investment Strategies
Given this volatile fiscal backdrop and market response, here are a few exchange-traded fund (ETF) strategies for investors:
Demand Grows for Downside Protection in Treasury Markets
Traders are increasingly paying premiums to hedge against further losses on long-term bonds. Puts protecting against higher yields are commanding the highest premiums since April, when Trump’s aggressive trade stance rattled markets. Bet on inverse bond ETFs like ProShares UltraShort 20+ Year Treasury (TBT - Free Report) . The ETF gained 1.7% on May 20, 2025.
Investors Eye Alternatives to U.S. Assets
With long-term yields rising and policy uncertainty mounting, global investors may increasingly look elsewhere. Investors can try Europe ETFs like Vanguard European Stock Index Fund ETF (VGK - Free Report) . Europe ETFs have outperformed the S&P 500 this year due to cheaper valuation, upbeat economic growth, more sustainable earnings pattern, less tech exposure, and cooling inflation.
Try Short-Term U.S. Treasury ETFs
The iShares 0-3 Month Treasury Bond ETF (SGOV - Free Report) offers low interest rate and default risk. Moreover, with the Fed being less dovish, these short-term funds are providing attractive yields. SGOV currently yields 4.70% annually and charges a low expense ratio of just 9 basis points. The fund is up 0.1% over the past week (as of May 20, 2025).
Hedge Rising Rates With Niche ETFs
There are some niche ETFs that guard against rising rates. These ETF options are: Simplify Interest Rate Hedge ETF (PFIX - Free Report) , Global X Interest Rate Hedge ETF (RATE - Free Report) and Foliobeyond Rising Rates ETF (RISR - Free Report) . These ETFs gained 1.9%, 1% and 0.7% on May 20, respectively.
Emerging Market Bond ETFs: Another Investing Option
Emerging market bonds are higher-yielding, but come with higher risk. The ETF (EMB - Free Report) yields 5.26% annually. The ETF has gained about 3% past month and 0.2% past week.