Billed on Wall Street as so rock-solid safe they’re risk-free, US Treasury bonds have long served as first port of call for investors during times of panic. They rallied during the global financial crisis, on 9/11 and even when America’s own credit rating was cut.
But now, as President Donald Trump unleashes an all-out assault on global trade, their status as the world’s safe haven is increasingly coming into question.
Yields, especially on longer-term debt, have surged in recent days while the dollar has plunged. Even more disconcerting is the pattern of the recent market moves. Investors have often dumped 10- and 30-year Treasuries — pushing prices down and yields up — at the very same time they frantically sold stocks, crypto and other risky assets. The inverse is also true, with Treasuries rising in unison with them.
They are trading, in other words, a little like a risky asset themselves. Or, as former Treasury Secretary Lawrence Summers says, like the debt of an emerging-market country.
Even if this dynamic was to fade as swings in stocks eventually normalize, as most analysts expect, a message has been delivered to policymakers in Washington: Investor confidence in US bonds can no longer be taken for granted — not after a years-long borrowing binge that swelled its debt load and not with a president in the White House hell-bent on rewriting the rules at home and abroad and antagonizing, in the process, many of the country’s biggest creditors.
This has profound implications for the global financial system. As the world’s ‘risk-free’ asset, Treasuries are used as a benchmark to determine the price of everything from stocks to sovereign bonds to mortgage rates, while serving as collateral for trillions of dollars of lending a day.
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Treasuries and the dollar get their strength from “the world’s perception of the competence of American fiscal and monetary management and the solidity of American political and financial institutions,” said Jim Grant, founder of Grant’s Interest Rate Observer, a widely followed financial newsletter. “Possibly, the world is reconsidering.”
Friday was more evidence of the same. As US stocks opened the session lower, 30-year yields were surging, touching as high as 4.99%. As shares advanced into the afternoon session, long bonds rallied in tandem.
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“Treasuries are not behaving as a safe haven,” said ING rates strategist Padhraic Garvey. “If we were to slip into recession there is a path there for yields to revert lower. But the here and now is painting Treasuries as a tainted product, and that’s not comfortable territory. Treasuries have proved to be a pain trade too.”
What Bloomberg’s strategists are saying...
“Treasuries are losing their haven status. Capital is leaving the US at an increasing rate as the dollar’s reserve-currency standing is diminished, and the risk of a recession raises the likelihood of an inflation-stoking double-digit fiscal deficit.”Simon White, macro strategist
Not everyone is convinced that investors are losing faith in the safety of US government debt.
Benson Durham, head of global asset allocation at Piper Sandler and a former Federal Reserve economist, has done his own analysis comparing key Treasury-market metrics to those in Europe. Some measures suggest investors have demanded less of a premium to own US debt relative to German and UK bonds in recent days, he said.
“People are right to kind of worry about this general economic management,” Durham said. But “it’s not clear to me, at least not yet, that this is an episode where people are particularly penalizing US assets.”
There are suggestions in markets, albeit lacking the hard evidence to back them up, that Treasuries may have fallen because China is selling or shunning them. Some debate whether Beijing might eventually dump US debt as a response to the US tariffs.
Others say more technical factors are behind the selloff in the long-end. There are signs that hedge funds have been unwinding leveraged trades that capitalize on price differences between Treasuries and interest-rate swaps or futures contracts.
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Treasury Secretary Scott Bessent backed that view in an appearance on Fox Business earlier this week.
“I believe that there is nothing systemic about this — I think that it is an uncomfortable but normal deleveraging that’s going on in the bond market,” said Bessent, who on taking office advertised lower 10-year borrowing costs as an ambition.
An auction of 30-year bonds on Thursday also saw investors snap up US$22 billion ($28.95 billion) of the debt, supporting the argument that Treasuries continue to be attractive even during the selloff.
That’s not to say that markets are behaving as usual, however.
Through Thursday US stocks had plunged 7% since Trump announced plans to ramp up tariffs on dozens of countries on April 2. Rather than tumble, 30-year yields actually rose around 40 basis points in the span, only the fifth time in data going back to the 1970s that moves of this magnitude have occurred simultaneously.
A raft of traders and hedge fund strategies have struggled to navigate the recent volatility, leading to steep losses.
The surge in yields also poses a risk to Trump’s stated goal of cutting taxes while reining in the budget deficit, and was at least in part behind his decision Wednesday to announce a 90-day pause on higher tariffs for dozens of countries.
“Long-term interest rates are gapping up, even as the stock market moves sharply downwards,” Summers, who is also a paid Bloomberg contributor, wrote this week in a social media post. “We are being treated by global financial markets like a problematic emerging market,” he said, adding that “this could set off all kinds of vicious spirals, given government debts and deficits and dependence on foreign purchasers.”
If foreign investors do decide to continue retreating from US assets, the pain could be substantial. They hold about US$7 trillion in Treasuries, US$19 trillion of equities and US$5 trillion of corporate debt, accounting for about 20% to 30% of the total market, according to Torsten Slok, chief economist at Apollo Global Management Inc.
If recent history is any guide, a buyers’ strike may have long-lasting repercussions for US borrowing costs.
Just three years ago, investor pushback against UK Prime Minister Liz Truss’ unfunded tax cuts fueled a surge in yields the country has yet to recover from, while the pound never bounced back from 2016’s Brexit vote.
“There is a distrust by the market created by the on-off tariffs, and that definitely adds an uncertainty premium,” said Shamil Gohil, a portfolio manager at Fidelity International. “Large fiscal deficits will lead to continued concerns on debt sustainability which will likely require some risk premium to hold Treasuries.”
Nathan Thooft, a senior portfolio manager at Manulife Investment Management, said Treasuries still dominate global markets in terms of quality and depth, but acknowledged that recent events have chipped away at investor confidence.
“Much of the challenge we have seen over the last decade have been policy dynamics or geopolitical dynamics that were driven outside of the United States,” he said. “It’s a different dynamic this time, which is causing people to be less confident in US assets, both on the equity side and on the fixed-income side. There has probably been some permanent damage.”
It’s also different this time because the Fed, worried about how tariffs could fuel a jump in inflation, is less likely to bail out the bond market by lowering rates anytime soon.
“You can’t count on” long-term Treasuries as a hedge, said Russell Brownback, a portfolio manager at BlackRock Inc. “That is the fixed-income regime we are in now.”
