Bloomberg: Has U.S. Treasury really lost its safe-haven appeal?

Some market observers believe that the market trends in April may signal a shift in the global landscape and a reassessment of assets crucial to the dominance of the U.S. economy.

Written by: Alice Atkins & Liz Capo McCormick, Bloomberg

Translated by: Felix, PANews

Investors typically flock to U.S. Treasury bonds to escape the turbulence of financial markets. During the global financial crisis, the 9/11 attacks, and even when the U.S. credit rating was downgraded, U.S. Treasury bonds rebounded.

However, in early April, amidst the chaos caused by President Trump's implementation of "reciprocal" tariffs, something unusual happened. As risk assets like stocks and cryptocurrencies plummeted, U.S. Treasury prices did not rise but instead fell. U.S. Treasury yields recorded their largest weekly increase in over twenty years.

For a long time, the US 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 of the world's largest economy. For decades, it has helped the US control borrowing costs. However, recently, the trading performance of US Treasury bonds has resembled that of a risk asset. Former Treasury Secretary Lawrence Summers even stated that the performance of US Treasury bonds is akin to the debt of emerging market countries.

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 loans amounting to trillions of dollars every day.

The following are some viewpoints presented 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 most "reciprocal" tariffs for 90 days, the tariffs imposed on China are still much higher than previously expected. Additionally, tariffs are still being levied on cars, 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 on these tariff costs to 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 provided by those bonds.

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 suppressing inflation.

Chasing Cash

Some investors may have sold off U.S. Treasuries and other U.S. assets in favor of the ultimate safe haven: cash. As the Federal Reserve delays interest rate cuts, the asset size in U.S. money market funds continues to soar, reaching a record high in the week ending April 2. Money market funds are generally viewed as cash equivalents, and they also have an added benefit: they can generate returns over time.

Policy Uncertainty

Investors demand higher returns when investing in countries with political turmoil and economic instability. This is one of the reasons why Argentina's government bonds had yields as high 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 inflows into the United States is the belief that the American judicial system and other national institutions can constrain the U.S. government and ensure a certain degree of policy continuity. Trump's willingness to challenge lawyers who obstruct his actions 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.

Financial Pressure

In the mid-1970s, the US dollar replaced gold as the world's reserve asset, and central banks around the world began purchasing US Treasury bonds to store dollar reserves. Since the federal government has never defaulted on its debt obligations, US Treasury bonds are considered a solid investment.

U.S. national debt currently accounts for 121% of GDP. At the beginning of his term, Trump bet on stimulating economic growth through tax cuts to reduce the budget deficit, and recently he has hinted that tariff revenues also help alleviate the budget deficit.

But some are concerned that his policies will only exacerbate the national debt. In addition to his planned additional tax cuts, Trump is trying to make the tax cuts implemented during his first term permanent. If tariffs lead to an economic recession, the government may face pressure to increase spending.

In light of this, Fidelity International's fixed income investment manager Mike Riddell said the spiral in US Treasury yields could signal "capital flight" as foreign investors became increasingly reluctant to fund the US deficit. "It is clear that the global 'bond volunteers' are still active".

US debt levels are expected to rise

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

Foreign Sell-off

Although it is difficult to prove in real-time, when U.S. Treasury prices fall, people often speculate that it is due to foreign selling. 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. Treasuries held by China could be its potential bargaining chip against the United States—though a massive sell-off might depress 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. This 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 that "U.S. Treasury bonds would outperform interest rate swaps" suddenly collapsed. In fact, interest rate swaps performed well because banks liquidated bonds to meet clients' liquidity demands, and then increased swap contracts to maintain a certain exposure in case the bond market might rise.

If not U.S. Treasury bonds, then what would it be?

Fund managers in Europe and Japan have found that, besides purchasing U.S. Treasury bonds, there are now reliable alternatives, which may attract them to shift their allocations towards markets that appear to have more stable policy prospects. Amid broader turmoil, German bonds are one of the major beneficiaries.

Gold, a traditional safe-haven asset, soared to historical highs in April, outperforming almost all other major asset classes. For some time, central banks around the world have been stockpiling this precious metal in hopes of diversifying their assets and reducing dependence on dollar-denominated assets. However, unlike bonds, investing in gold does not yield fixed returns. Returns on gold investments only materialize when sold at a higher price.

Ultimately, no investment can provide the kind of liquidity and depth as the U.S. Treasury market. Withdrawing from the U.S. Treasury market can take years, not just 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.