Over the past few weeks, long-term U.S. interest rates have rebounded sharply. Markets are now questioning the accommodative stance they expected from the Fed just a few months ago: employment remains solid, growth is resilient, and the Trump administration’s tariffs have ultimately created more fiscal room than economic tension. As a result, expectations of key rate cuts have faded, inflation trajectories have been reassessed, and long-term yields have risen by roughly 20 basis points over the month. The 30-year U.S. Treasury yield is now hovering around 4.7%, up from 4.5%, reflecting fears of stronger-than-expected growth.

 

This rise in yields does not signal imbalance or increased credit risk (as is currently the case in France). Instead, it reflects a healthy U.S. economy, a more balanced budget supported by nearly $30 billion per month in tariff revenues, and a Fed that remains cautious without being alarmed. For bond investors, this environment may offer an attractive opportunity to reinforce portfolio protection at a time of rising volatility in other markets: long-term Treasuries, with maturities of 10 to 20 years, now yield close to 4.8% with no credit risk beyond that of the U.S. government—a far more systemic, long-term issue that is currently lower than corporate risk, given rock-bottom credit spreads in the private sector and in Europe. Even if yields were to rise another 40–50 basis points—to around 5.2–5.3%, the recent highs—the potential one-year loss would remain limited or even offset through carry. And in a scenario of market stress, renewed expectations of Fed cuts, or a flight to quality, these bonds would fully deliver their hedging role.

 

Currency hedging should be avoided when implementing this strategy, as hedge costs remain elevated and may deter some investors. In our view, however, the unhedged exposure does not represent significant risk at current dollar levels, especially for long-term positions aligned with the structural economic strengths of the United States. An additional 2% of annual return over several years should more than compensate for potential adverse currency movements. Conversely, such positions should not be considered for short-term horizons of only a few weeks.

 

Europe, by contrast, remains stuck: governments have virtually no fiscal space, yields are significantly lower, and public balance sheets are increasingly burdensome. OATs and Bunds provide little cushion and considerable risk, while narrow spreads offer scant incentive to take duration or credit risk in European markets. We therefore prefer to remain positioned in 2- to 4-year bonds of intermediate quality with strong visibility.

 

Last week, we expressed reservations about certain segments of private debt—particularly some highly aggressive funds. A report released this week by the International Association of Insurance Supervisors (IAIS) reinforces these concerns. During the 2010s, insurers—seeking yield—bought these assets en masse to counter falling interest rates. They now find themselves holding illiquid, complex portfolios that are difficult to value. Recent defaults have prompted a reassessment of these exposures: not only must underlying companies refinance at much higher or even prohibitive rates, but insurers themselves are beginning to acknowledge that the “stability” of these assets was largely an illusion, sustained mainly by their lack of ratings, and therefore by regulatory blind spots. Authorities are now calling for alternative assets to be clearly classified according to three criteria—valuation uncertainty, illiquidity, and complexity—precisely what had been overlooked for a decade, even as listed bond markets faced increasing regulatory scrutiny. The irony is hard to miss.

 

This risk is especially relevant today because mid-sized companies—the primary borrowers in these private debt markets, as they are too small to issue publicly—are struggling to preserve their margins. According to the ATH Observatory, the average operating margin fell to 4.1% in 2024 from 4.6% in 2021, despite nominally stable revenue. Inflation has done damage: higher wages, increased production costs, and pressure on selling prices in a gloomy economic and social environment. Financial structures still look solid on paper, but compressed margins combined with rising interest expenses point to tougher times ahead. The equation is simple: without growth, with limited bargaining power (unlike global brands, which benefited during the inflation spikes of 2020–2022), and with refinancing costs climbing at each maturity for the past three years, many SMEs and mid-caps risk becoming the new weak links of European credit—far more so than large high-yield issuers with deeper, more diversified financing sources and far greater flexibility in terms of balance-sheet management, diversification, and asset disposals.

 

Matthieu Bailly