Confidence in U.S. Government Bonds Can No Longer be Taken for Granted
Amongst the financial carnage inflicted on the global markets by the introduction of punitive tariffs by President Donald Trump, global investors have been fleeing to safe haven assets, which for the first time in living memory does not include Treasuries or U.S. Government Bonds. Treasury bonds have had a tradition of being first in line for investors during adverse conditions which was true during the Global Financial Crisis, on 9/11, and even when the United States’ credit rating was cut, where Treasuries were seen to rally.
However, in today’s markets, and as Donald Trump has declared war on global trade, US Treasuries are now being questioned as the world’s best safe haven as can be seen in their surging yields*. Many experts and analysts agree that US Government Bonds and the US Dollar (which has in recent days plunged), rely on the world’s confidence in the financial and political systems of the United States in order to get their strength.
*Treasury Yields – Yields and Treasury prices have an inverse relationship as when Treasury prices rise yields fall and vice versa. Therefore when investors sell treasuries the yield rises and when they buy the yield falls.
The faith in the systems of the United States is now being tested as Thursday saw foreign investors en masse retreating for US assets with equities, treasuries, and the USD Dollar all falling together. The US Dollar fell against the Swiss Franc and the Euro by the most in 10 years, whilst 30-year Treasury yields headed north to 4.87% surging by 13 basis points. The point here is that when investors in the United States and from global markets sell off stocks, they usually find safety in U.S. Government bonds, so following the stock market route yields on treasuries rose, which is totally the opposite of trends in the near and distant past.
Economists have noted that the problems in the U.S. Government Bond market will have deep implications for the global financial system, because as Treasuries are (or were) regarded as “Risk Free Asset” they are utilised as a benchmark determining the price of stocks, mortgage rates, sovereign bonds, nearly everything including collateral for intra-day lending in the amount of trillions of US Dollars. US assets in general now appear to be being repriced as sentiment towards the U.S. as a safe haven diminishes.
There are however some dissenting voices who have concluded not everyone is losing faith in the United States’ political and financial systems. Indeed, some experts expound that long-end Treasury sell-offs are due to technical factors such as hedge funds unwinding leverage trades, with Treasury Secretary Scott Bessent backing these views. There was even an auction of USD 22 Billion 30-year bonds on Thursday with investors, despite tariff driven volatility, showing solid demand as they did for the sale of 10-year bonds on Wednesday.
However, whatever views are held it is generally believed by experts that a message has been delivered to The White House that confidence in U.S. Government bonds can no longer be taken for granted. The lack of clarity in this administration’s policies together with their President antagonising allies and enemies alike, including their largest creditors, through his determination to rewrite the financial and trading global rules, will in the eyes of many see the rest of the world in the long run look elsewhere for safe haven assets.
