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

Original authors: Alice Atkins & Liz Capo McCormick, Bloomberg

Original text compiled by: Felix, PANews

Investors often flock to U.S. Treasuries to escape the turmoil in financial markets. U.S. Treasuries rebounded during the global financial crisis, 9/11, and even during the downgrade of America's own credit rating.

However, in the chaos caused by President Trump's implementation of "reciprocal" tariffs in early April, something unusual happened. As risk assets like stocks and cryptocurrencies plummeted, U.S. Treasury prices not only did not rise, but actually fell. The yield on U.S. Treasuries recorded its largest weekly gain in over twenty years.

For a long time, U.S. Treasury bonds, with a market size of $29 trillion, have been seen as a safe haven during market turbulence, which has been a unique advantage of 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 has resembled that of a risk asset. Former Treasury Secretary Lawrence Summers even stated that the performance of U.S. 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 daily loans amounting to trillions of dollars.

The following are some views put forward by investors and market forecasters to explain the unusual fluctuations of 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. 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 the costs of these tariffs to consumers in the form of price increases. Inflation shocks will dampen demand for government bonds, as they erode 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.

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Chasing Cash

Some investors may have sold U.S. Treasuries and other U.S. assets, turning to the ultimate safe haven: cash. As the Federal Reserve delayed interest rate cuts, the asset size in U.S. money market funds continued to soar, reaching a record high in the week ending April 2. Money market funds are generally seen as cash-like, and they have the added benefit of generating 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 Argentine 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 inflow into the United States is the belief that the U.S. judicial system and other national institutions have the power to constrain the U.S. government and ensure a certain degree of policy continuity. Trump's willingness to challenge the lawyers who obstruct his actions and to compel the Federal Reserve and other independent agencies to submit to his will may undermine some people's confidence in the checks and balances that once helped the U.S. become the 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 hold dollar reserves. Since the federal government has never defaulted on its debt commitments, US Treasury bonds are considered a solid investment.

U.S. Treasury securities currently account for 121% of the gross domestic product. At the beginning of Trump's term, he bet that stimulating economic growth through tax cuts would reduce the budget deficit, and recently he has hinted that tariff revenue would also help ease the budget deficit.

But some are also concerned that his policies will only exacerbate the national debt. Besides the additional tax cuts he plans, 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 this regard, Mike Riddell, a fixed income investment manager at Fidelity International, stated that the spiraling rise in U.S. Treasury yields may signal "capital flight" as foreign investors become increasingly reluctant to finance America's deficits. "The global 'bond vigilantes' are clearly still active."

The level of US debt is expected to rise.

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 of the Chinese government in them. However, strategists often point out that the U.S. Treasury bonds held by China may be its potential bargaining chip against the United States—even though a large-scale sell-off could 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 in early April. It is a popular hedge fund strategy that profits from the price difference between cash Treasuries and futures.

This price difference is usually small, so investors often use a large amount of leverage to fund their trades. When market turmoil hits and investors rush to quickly close their positions to repay loans, it can trigger issues. The risk is that this could lead to a chain reaction, causing yields to spiral upward, or worse, causing the government bond market to come to a standstill, as happened during the basis trading liquidation in 2020.

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

If it's not 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 options that may attract them to shift their capital allocation to 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 new all-time high in April, outperforming almost every other major asset class. Central banks have been hoarding the precious metal for some time in an effort to diversify their assets and reduce their reliance on dollar assets. However, unlike bonds, investing in gold does not bring a fixed income. Investing in gold will only pay off if you sell it when the price rises.

Ultimately, no investment can provide the same level of liquidity and depth as the U.S. Treasury market. In reality, withdrawing from the U.S. Treasury market takes years, not 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 crucial to the dominance of the U.S. economy.

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