By Martin Baccardax

Imagine an innovation-driven global powerhouse, with interests and influence in virtually every country in the world, that ratings companies trust as a fail-safe bet to use investors' borrowed cash wisely and return it timely.

Just a few months ago, you could have reliably used that description to characterize the U.S. government and its Treasury bonds. Today, investors are essentially saying the same thing about Microsoft. But that doesn't mean investors should trade in their Treasuries for the Windows and AI-backed paper just yet.

Yields on the short-term bonds issued by the world's most valuable company -- an AAA-rated tech giant that generates more than $60 billion in year in free cash flow -- are trading lower than the yields on equivalent U.S. Treasury notes -- from an Aa1-rated government that takes in $4.9 trillion in taxes each year. Bond prices move in the opposite direction of yields, and lower yields often signify that investors see less risk in holding those securities.

For debt with longer maturities, the extra yield, or spread, that investors demand to own Microsoft's 30-year bond -- instead of allegedly risk-free 30-year Treasuries -- is just 20 basis points. That's the lowest on record, according to data from Bank of America's weekly 'Flow Show' report, and down from more than 100 basis points just two years ago. (One hundred basis points equals one percentage point.)

Now, as an investor, there are two possible rationales for this: One, you either think the likelihood of Microsoft paying its coupon on time over the next three decades, and making you whole at the end, is roughly the same as the U.S. government, or, two, you think U.S. Treasuries are wildly undervalued.

Signals from BofA's 'Flow Show' report suggest it might be the latter.

The 10-year rolling return for a basket of longer-dated Treasuries, based on current pricing, turned negative for the first time in decades this year, according to BofA figures. The return of around -1.3%, in fact, matched the "humiliating place stock returns were" during the market's trough in February 2009, during the global financial crisis, the bank said.

Sharp-eyed readers will note, of course, that stocks bottomed out the following month and embarked on the longest bull run in financial market history, with the S&P 500 delivering annualized returns of 17.8% for each of the next 10 years.

U.S. Treasuries might not be ready for that kind of roaring gain. But after Moody's stripped the government of its coveted AAA-status last week and 30-year bond yields topped 5.15% earlier this week, the highest since 2007, investors are starting to see value.

Around $25 billion in new money found its way into bond portfolios in the latest week, BofA's flow report indicated, outpacing the $16 billion moved into cash. Stock funds, meanwhile, suffered their first outflows in two months, losing $4.1 billion even as the S&P 500 rallied to within 3% of its all time high.

Oscar Wilde once noted that a cynic is the sort of person that knows the price of everything, but the value of nothing. As Treasuries sold off this week, there appeared to be plenty of cynics focused on the government bonds' levels and the impact of U.S. fiscal profligacy, discounting the value in the trade as a result.

Long-dated yields are moving lower in early Friday trading, and could rally even further next week if minutes from the Federal Reserve's May policy meeting hint another rate cut or a tamer-than-expected reading of the April's personal consumption expenditures, or PCE, inflation gauge.

"[There is] nothing more contrarian in 2025 than being long the long-end, " BofA writes. "And while the 2020s spending of Biden's Build Back Better + taxation of Trump's Big Beautiful Bill don't a AAA-rating make, we say return of bond vigilantes to (the 5% level on 30-year Treasury yields) is a cyclical buy opportunity."

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May 23, 2025 12:21 ET (16:21 GMT)

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