Bloomberg: Are U.S. Treasuries Really Losing Their Safe-Haven Appeal?

Author: Alice Atkins & Liz Capo McCormick, Bloomberg

Compiled by: Felix, PANews

Investors typically flock to U.S. Treasury bonds to avoid turbulence in the financial markets. During the global financial crisis, the 9/11 attacks, and even when the U.S. itself experienced a downgrade in its credit rating, U.S. Treasury bonds saw a rebound.

In early April, however, in the chaos caused by President Trump's imposition of "reciprocal" tariffs, something unusual happened. As risky assets such as stocks and cryptocurrencies plummeted, the price of US Treasuries fell instead of rising. U.S. Treasury yields posted their biggest weekly gain in more than two decades.

For a long time, U.S. Treasury bonds, with a market size of $29 trillion, have been regarded as a safe haven during market turbulence, which has always been a unique advantage for the world's largest economy. For decades, they have helped the U.S. control borrowing costs. However, recently, the trading performance of U.S. Treasury bonds resembles that of a risk asset. Former Treasury Secretary Lawrence Summers even stated that the performance of U.S. Treasury bonds is akin to that of emerging market countries' debt.

This has a profound impact on the global financial system. As a "risk-free" asset globally, U.S. Treasury bonds are used as a benchmark for pricing various assets, from stocks to sovereign bonds and mortgage rates, while also serving as collateral for tens of trillions of dollars in loans every day.

Here are some viewpoints proposed by investors and market forecasters to explain the unusual fluctuations in U.S. Treasury bonds in April, as well as some potential alternative "safe havens."

Tariff-driven inflation

Even though Trump has suspended the implementation of most "reciprocal" tariffs for 90 days, the tariffs imposed on China are still much higher than previously expected. Additionally, tariffs continue to be imposed on automobiles, steel, aluminum, and various goods from Canada and Mexico, and Trump has threatened to impose more import tariffs in the future.

People are concerned that companies will pass these tariff costs onto consumers in the form of price increases. The inflation shock will dampen demand for government bonds, as it erodes the future value of the fixed income payments that government bonds provide.

If rising prices are accompanied by a decline in economic output or zero growth (the so-called stagflation), monetary policy will enter a new period of uncertainty, and the Federal Reserve will be forced to choose between supporting economic growth and curbing inflation.

Chasing Cash

Some investors may have sold U.S. Treasury bonds and other American assets in favor of the ultimate safe haven: cash. As the Federal Reserve delays interest rate cuts, the assets in U.S. money market funds continue to surge, reaching a record high in the week ending April 2. Money market funds are typically seen as cash equivalents, and they have the added benefit of generating returns over time.

Policy Uncertainty

Investors demand higher rates of return when investing in politically volatile and economically unstable countries. This is one of the reasons why Argentine government bonds yielded as much as 13% in mid-April.

Trump's unexpected political strategies and radical tariff policies make it difficult to predict how friendly the investment environment in the United States will be a year from now.

Another factor driving capital inflow into the United States is the belief that the U.S. judicial system and other national institutions can constrain the government and ensure a certain degree of policy continuity. Trump's willingness to challenge the lawyers who obstruct him and to force the Federal Reserve and other independent agencies to bend to his will may undermine some people's confidence in the checks and balances that once helped the U.S. become the world's largest destination for foreign investment.

Fiscal Pressure

In the mid-70s of the 20th century, the U.S. dollar replaced gold as the world's reserve asset, and central banks bought U.S. Treasury bonds to store U.S. dollar reserves. Because the federal government has never broken its debt service commitments, U.S. Treasuries are seen as a solid investment.

U.S. Treasury bonds currently account for 121% of the GDP. From the beginning of his term, Trump bet on stimulating economic growth through tax cuts to reduce the budget deficit, and recently he hinted that tariff revenues would also help alleviate the budget deficit.

But some people are also concerned that his policies will only exacerbate the national debt. In addition to the extra tax cuts he plans, Trump is trying to make the tax cuts implemented during his first term permanent. If the tariffs lead to a recession, the government may face pressure to increase spending.

In this regard, Mike Riddell, fixed income investment manager at Fidelity International, stated that the spiraling rise in U.S. Treasury yields may signal "capital flight," as foreign investors are increasingly unwilling to fund the U.S. deficit. "The global 'bond vigilantes' are clearly still active."

U.S. debt levels are expected to rise

! [Bloomberg: Are U.S. Treasuries Really Losing Their Safe-Haven Appeal?] ](https://img.gateio.im/social/moments-3961739cd880bb5f01e3d4f455442d37)

*The International Monetary Fund predicts that by * *2029*, the ratio of U.S. debt to gross domestic product will reach **131.7%**.*

Foreign Sell-off

Although it is difficult to prove in real-time, when U.S. Treasury prices fall, it is often speculated that foreigners are selling off. This time, some believe it is a response to Trump's tariff policy. China and Japan are the largest holders of U.S. Treasuries. Official data shows that both countries have been reducing their holdings for some time.

Given that trading activities in China are strictly confidential, it is difficult to speculate on the role the Chinese government plays in them. However, strategists often point out that the U.S. Treasury bonds held by China could be its potential bargaining chip against the United States — even though a large-scale sell-off could lower the value of China's foreign exchange reserves.

Hedge Fund Trading

Basis trading may be one reason for the surge in U.S. Treasury yields at the beginning of April. It is a popular hedge fund strategy that profits from the price difference between cash Treasuries and futures.

This spread is usually small, so investors often use a lot of leverage to fund trades. Problems can arise when market turmoil hits and investors rush to close their positions quickly to repay their loans. The risk is that this could trigger a ripple effect that could lead to a spiral in yields or, even worse, bring the Treasury market to a standstill, as happened in 2020 when the basis trade was unwinded.

Others pointed out that the previously popular bet of "U.S. Treasury performance outperforming interest rate swaps" suddenly collapsed. In fact, interest rate swaps performed well because banks liquidated bonds to meet clients' liquidity needs and then increased swap contracts to maintain a certain exposure in case the bond market might rise.

If it weren't U.S. Treasury bonds, what would it be?

Fund managers in Europe and Japan have found that in addition to buying U.S. Treasuries, there are now reliable alternatives that may entice them to shift their allocations towards markets where the policy outlook seems more stable. Amid broader turmoil, German bonds are one of the main beneficiaries.

Gold, a traditional safe-haven asset, surged to a historical high in April, outperforming almost all other major asset classes. For some time now, central banks around the world have been hoarding this precious metal in hopes of diversifying their assets and reducing dependence on dollar assets. However, unlike bonds, investing in gold does not yield fixed returns. Only by selling when prices rise can investors realize gains from gold investments.

Ultimately, no investment can provide the kind of liquidity and depth as the U.S. Treasury market. In reality, it would take years to withdraw from the U.S. Treasury market, not just a few weeks. However, some market observers believe that the market trends in April may signal a shift in the global landscape and a reassessment of assets that are crucial to the dominance of the U.S. economy.

Related reading: From falling prices to fiscal troubles, the chain reaction of U.S. Treasury sell-offs.