Why rising Treasury yields and efforts to tackle US healthcare costs are joined at the hip

For decades, US government bonds and healthcare stocks have been cornerstones of defensive portfolios.

US Treasuries have been among the ultimate ‘safe haven’ assets that global investors flock to in periods of economic and market stress. Their perceived security is grounded in the US government’s credit quality and US economic clout.

The healthcare sector, meanwhile, has generally been considered firmer territory for equities investors when global stockmarkets have been rocky. After all, demand for medicine and care is relatively inelastic and is prioritised over discretionary spending.

In 2025, though, these assets have both behaved contrary to historical patterns, unravelling investors’ assumptions with both these asset classes performing poorly in the aftermath of Trumps’ tariff announcements and the sharp sell-off seen in global risk assets. Their shift towards being seen as riskier assets largely stems from the same root cause: the poor fiscal health of an ageing and heavily indebted US society.

We believe equities investors need to now take a particularly selective approach to healthcare. The role of Treasuries in portfolios should also be reconsidered very carefully.

Treasury markets have caught up with reality

When times are tough, investors have traditionally sought shelter in US Treasuries. During the global financial crisis in late 2008, for example, 10-year Treasury yields fell from 4% to almost 2%.¹ Similarly, they plunged below 1% during the height of the COVID-19 pandemic.²

Yet when President Trump announced sweeping import tariffs in April 2025, 10-year Treasury yields rose sharply from 4.0% to 4.5% in a two-week period.³ This signals a profound shift: investors now view Treasuries through the lens of fiscal risk after many years of nonchalantly tolerating runaway government spending.

Source: Federal Reserve Bank of St. Louis, June 2025.

The US fiscal trajectory is, frankly, unsustainable. The Congressional Budget Office projects government deficits averaging 5.8% of GDP over the coming decade, driven in part by the cost of servicing a national debt that surpassed 100% of GDP this year.⁴ Indeed, net interest expenses (equating to 3.1% of GDP in 2024) now exceed defence spending for the first time.⁵ Proposed tax cuts threaten to exacerbate the deficit and borrowing costs.

The longer-term fiscal picture is further compromised by demographics. By 2050, 22% of Americans are projected to be over 65, up from 17.7% today.⁶ An ageing population will reduce the worker-to-retiree ratio (even before proposed shifts in immigration policy) and rising social security and healthcare costs under the government-funded Medicare insurance system will strain budgets.

In this context, it should be unsurprising that investors are re-evaluating US government debt which lost its last ‘AAA’ credit rating this May.⁷ It should also be unsurprising that those focused on addressing the drivers of US fiscal ill-health, policymakers included, have honed in on the US$5tn a year US healthcare sector as a target.⁸

Healthcare is now in the firing line

A combination of demographics, medical advances and rising labour costs have continued to push up the share of national incomes spent on delivering healthcare. Across the OECD, healthcare spending growth outpaced broader economic growth by an average of 2.2 percentage points a year between 2007 and 2021.⁹

The US is an exception only in that this trend has been supercharged. Today, healthcare system costs account for almost 17% of US GDP, almost twice the OECD average of 9%.¹⁰ Overall, the US accounts for roughly two-fifths of global healthcare spending.¹¹

While the sector has historically continued to grow irrespective of the economic cycle, lending it defensive qualities for investors, US policy change is now disrupting this narrative. The landmark ‘One Big Beautiful Bill Act’ calls for substantial funding cuts or new requirements for Medicaid and Medicare.

Drug prices, which are higher in the US, have been singled out by the Trump administration for government intervention.¹² In May, Trump ordered pharmaceutical companies to voluntarily align all US prescription drug prices with other markets or face unspecified punishment. Drug prices account for barely 10% of overall US healthcare spending, though, which isn’t out of step with other developed markets.¹³

Source: American Medical Association, April 2025: Trends in health care spending.
* Net cost of health insurance: The difference between what insurers incur in premiums and the amount paid in benefits, including administrative costs, additions to reserves, rate credits and dividends, premium taxes and fees, and net underwriting gains or losses.

Political ire is increasingly turning to the intermediaries that play an outsized role within the US healthcare sector: pharmacy benefit managers (PBMs). These middlemen negotiate drug prices with manufacturers on behalf of distributors and create the drug formulations that insurers adopt. PBMs collectively receive an estimated US$300bn-plus in rebates each year from the pharmaceutical industry.¹⁴

These PBM models look vulnerable to tighter scrutiny and regulation in the current political and fiscal context, with investor pessimism reflected in recent market movements.

A selective approach to investing in healthcare

We believe that investors should take a more selective approach to investing in the healthcare sector, identifying individual opportunities based on whether they deliver genuine innovation for patients or can address healthcare system cost inflation.

Taking innovation, first. A price will likely be extracted from the pharmaceutical industry by the Trump administration – more drug prices will likely be capped either through regulation or voluntarily – but we believe genuine innovation that improves and extends life will continue to be rewarded commercially in the US. The Inflation Reduction Act, for instance, exempts large-molecule drugs that offer ‘substantial clinical improvements’ from new price caps until 13 years after they are approved.¹⁵

We see the prospects of pharma companies in the US therefore being determined by whether their therapies are transformative in the way that GLP-1 drugs are proving to be in addressing obesity and potentially other illnesses. Groundbreaking ‘advanced therapies’ that use gene therapy, cell therapy or tissue engineering to treat diseases or injuries also stand to command premium pricing. For those that can only convert their research and development spending into ‘me-too’ drugs (as has all too commonly been the case), however, the outlook looks less buoyant.

Second, we see compelling investment opportunities where companies can reduce the cost of delivering healthcare in the US. Given that labour accounts for roughly 60% of US hospital costs, products and services that can reduce the labour-intensity of delivering high-quality treatment should benefit from strong underlying demand.¹⁶

Alongside transformational innovations in medical technology, such as robotic arms that can be used to offer minimally-invasive surgery to more patients and at lower cost, are emerging software solutions that help healthcare providers better manage and interpret data, improving operational efficiency and driving better patient outcomes.

Navigating the grand shift in Treasuries’ status

As we wrote in early 2025, we believe the market could be mispricing the long-term risks embedded in US Treasuries, long a bedrock of stability and foundation stone of global multi-asset portfolios.    

Investors should not expect a return to ultra-low US Treasury yields. There are structural reasons underpinning elevated yields, not least the bountiful supply of debt: the US government needs to roll over US$7.9tn in maturing debt this year, and a further US$3.9tn in 2026.¹⁷

The US is not alone in facing the twin challenge of outsized fiscal deficits and spiralling healthcare spending; it is a phenomenon evident in most developed economies and signals higher government yields will be an ongoing feature across global bond markets.  

Equities investors meanwhile cannot remain aloof of elevated US Treasury yields: they are a standard ’risk free’ reference point for valuing equities, for now at least. Higher government bond yields should also theoretically feed through to lower equity market valuations.

The targeting of the US healthcare sector illustrates how, in the current fiscal context, equities investors also need to be wary of policy responses to tackle structural deficits. As long-held assumptions are being challenged, investors must adapt and take a more discriminating approach to assets that no longer look like ‘safe havens’.

¹ Bloomberg data, June 2025
² Bloomberg data, June 2025
³ Bloomberg data, June 2025
⁴ US Congressional Budget Office, March 2025: The Long-Term Budget Outlook: 2025 to 2055
⁵ US Congressional Budget Office, March 2025: The Long-Term Budget Outlook: 2025 to 2055 / Council on Foreign Relations, May 2024: For the First Time, the U.S. Is Spending More on Debt Interest than Defense
⁶ US Census Bureau, 2024 estimates
⁷ Moody’s downgraded the US government’s long-term issuer and senior secured ratings from ‘Aaa’ to ‘Aa1” on 16 May 2025. It follows earlier downgrades by the two other major credit ratings agencies, Fitch and S&P Global.
⁸ McKinsey, January 2025: What to expect in US healthcare in 2025 and beyond
⁹ OECD, 2023: Health care financing in times of high inflation
¹⁰ OECD, 2023: Health Statistics 2023
¹¹ World Health Organization, 2023: Global spending on health
¹² US Government Accountability Office, 2021: Prescription Drugs – Report to the Chairman, Committee on the Budget, U.S. Senate
¹³ Peterson Center on Healthcare-KFF, December 2024: How has U.S. spending on healthcare changed over time?
¹⁴ Drug Channels Institute, March 2024: The 2024 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers
¹⁵ IQVIA, 2024: The Impact of the Inflation Reduction Act on the Economic Lifecycle of a Pharmaceutical Brand
¹⁶ American Hospital Association, 2024: Cost of Caring Report
¹⁷ Bloomberg, May 2025

References to specific securities are for illustrative purposes only and should not be considered as a recommendation to buy or sell. Nothing presented herein is intended to constitute investment advice and no investment decision should be made solely based on this information. Nothing presented should be construed as a recommendation to purchase or sell a particular type of security or follow any investment technique or strategy. Information presented herein reflects Impax Asset Management’s views at a particular time. Such views are subject to change at any point and Impax Asset Management shall not be obligated to provide any notice. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary. While Impax Asset Management has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third-party information presented herein. No guarantee of investment performance is being provided and no inference to the contrary should be made.