Bloomberg: Has the U.S. Treasury Really Lost Its Haven Allure?

Original Title: Are US Treasuries Really Losing Their Safe-Haven Appeal?

Original Authors: Alice Atkins & Liz Capo McCormick, Bloomberg

Translation: Felix, PANews

Investors usually flock to U.S. Treasuries to avoid turmoil in the financial markets. During the global financial crisis, the 9/11 attacks, and even when the U.S. credit rating was downgraded, U.S. Treasuries saw a rebound.

However, in early April, during the chaos sparked by President Trump's implementation of "reciprocal" tariffs, something unusual happened. As stocks and risk assets like cryptocurrencies plummeted, instead of rising, U.S. Treasury prices fell. The U.S. Treasury yields saw the largest weekly increase in over two decades.

For a long time, U.S. Treasuries, with a market size of $29 trillion, have been seen as a safe haven during market turbulence, representing a unique advantage of the world's largest economy. For decades, it has helped the U.S. control borrowing costs. But recently, the trading performance of U.S. Treasuries has looked more like that of a risk asset. Former Treasury Secretary Lawrence Summers even said that the U.S. Treasuries are behaving like the debt of emerging market countries.

This has profound implications for the global financial system. As the global "risk-free" asset, U.S. Treasuries are used as the benchmark for pricing everything from stocks to sovereign bonds and mortgage rates, while also serving as collateral for trillions of dollars in daily loans.

Below are some viewpoints proposed by investors and market forecasters to explain the unusual volatility in U.S. Treasuries in April and some potential alternative "safe havens."

Tariff-Driven Inflation

Even though President Trump has suspended the implementation of most "reciprocal" tariffs for 90 days, tariffs imposed on China are still much higher than previously expected. Tariffs on cars, steel, aluminum, and various goods from Canada and Mexico are still in place, with Trump threatening to impose more import tariffs in the future.

There are concerns that businesses will pass on these tariff costs to consumers in the form of price hikes. The inflation shock would dampen the demand for Treasuries as it would erode the future value of the fixed income payments they provide.

If soaring prices are accompanied by a reduction in economic output or zero growth (known as stagflation), monetary policy will enter a new period of uncertainty, with the Fed forced to choose between supporting economic growth and curbing inflation.

Cash Chase

Some investors may have already sold off U.S. Treasury bonds and other U.S. assets, turning to the ultimate safe haven: cash. With the Fed delaying rate cuts, assets in U.S. money market funds have continued to soar, reaching a record high in the week ending April 2. Money market funds are typically seen as cash equivalents, with the added benefit of yield over time.

Policy Uncertainty

Investors demand higher returns when investing in politically turbulent, economically unstable countries. That's why Argentine government bond yields soared to 13% in mid-April.

Trump's unpredictable political strategies and aggressive tariff policies make it hard to predict how investment-friendly the U.S. will be a year from now.

Another factor driving funds into the U.S. is the belief that the strength of the U.S. judicial system and other institutions can constrain the U.S. government and ensure some policy continuity. Trump's willingness to challenge legal hindrances and force the Fed and other independent institutions to bend to his will may undermine some people's confidence in the checks and balances that have helped make the U.S. the world's top foreign direct investment destination.

Fiscal Pressure

In the mid-1970s, the dollar replaced gold as the world's reserve asset, with central banks around the world buying U.S. Treasury bonds to hold dollar reserves. Because the federal government has never reneged on its debt obligations, U.S. Treasuries have been viewed as a safe investment.

U.S. government debt currently stands at 121% of GDP. Trump bet early on in his presidency that tax cuts to stimulate economic growth would reduce the budget deficit, and recently hinted that tariff revenues would also help ease the deficit.

However, some worry his policies will only worsen the national debt. Apart from additional tax-cut measures in his plans, Trump is seeking to make permanent the tax cuts implemented in his first term. If tariffs lead to an economic downturn, the government may face pressure to increase spending.

In light of this, Mike Riddell, international fixed income investment manager at Fidelity, suggests the spiraling rise in U.S. Treasury yields could be signaling a "capital flight" as foreign investors become increasingly unwilling to fund the U.S. deficit. The global "bond vigilantes" clearly remain active.

U.S. debt levels are expected to rise

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

Foreign Sell-Off

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

Given that China's trading activity is highly secretive, it is challenging to speculate on the role of the Chinese government. However, analysts often point out that China's holdings of U.S. Treasurys could be a potential bargaining chip—even though a large sell-off could depress the value of China's foreign exchange reserves.

Hedge Fund Trades

Basis trading may have been one reason for the sharp rise in U.S. Treasury bond yields in early April. This is a popular hedge fund strategy that profits from the price difference between cash Treasurys and futures.

Since this spread is typically small, investors often use significant leverage to fund the trade. When market turbulence hits and investors are eager to quickly unwind their positions to repay loans, it can trigger issues. The risk is that this could set off a chain reaction leading to a spiraling increase in yields, or worse, causing the Treasury market to seize up, as seen during the 2020 basis trade unwind.

Others point out that the previously prevalent "U.S. Treasury outperformance versus rate swap" bet suddenly imploded. In fact, rate swaps outperformed as banks liquidated bonds to meet client liquidity demands and then added swap contracts to maintain a certain exposure in case of a bond market rally.

If not U.S. Treasurys, then what?

Fund managers in Europe and Japan have found alternative options besides purchasing U.S. Treasurys that may attract them to reallocate funds to seemingly more stable policy outlooks. Amid broader turmoil, German bonds have been among the main beneficiaries.

Gold, a traditional safe-haven asset, surged to a historical high in April, outperforming nearly all other major asset classes. Central banks worldwide have been stockpiling this precious metal for some time, aiming to diversify assets and reduce reliance on dollar-denominated assets. However, unlike bonds, investing in gold does not offer a fixed income. Gold investment only yields returns when sold at a higher price.

Ultimately, no investment can provide the level of liquidity and depth that the U.S. Treasury market offers. It would take years, not weeks, to fully divest from the U.S. Treasury market. However, some market observers believe that April's market dynamics may signal a shift in the global landscape and a reassessment of assets crucial to the U.S. economic dominance.

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