- U.S. Treasuries have long been the asset of choice when uncertainty, fear and panic drive investors to seek safety.
- But that reputation has been seriously damaged in recent times, amid historic bond selling and growing fears of default.
- Financial markets are engaged in a growing debate over the risks lurking in Treasuries, with prominent voices raising doubts.
U.S. Treasuries have long been the asset of choice when uncertainty, fear and widespread panic prompt investors to seek safety – but that reputation has taken a hit lately.
Financial markets are engaged in a growing debate over the risks lurking in Treasuries, with prominent voices raising doubts. On Friday, Moody’s lowered the outlook for US credit to “negative”, signaling that a downgrade is possible in the future.
It comes as massive deficits have driven up debt, while the historic sell-off in US bonds, triggered by Federal Reserve rate hikes, has highlighted that prices are also vulnerable.
“There are people talking about bitcoin, stocks as ‘safe assets’ because they have lost confidence in government bonds as safe assets due to the nature of this interest rate risk,” he said. economist Mohamed El-Erian told CNBC last month. .
Meanwhile, Principal Asset’s Seema Shah told CNBC in a separate interview last month that “there are so many different forces shaking up the bond space that it’s hard to really say with great conviction that today Treasury bonds are your safe haven.”
In June, a report from the Dallas Federal Reserve said buyers viewed short-duration Treasuries as a true safe haven, noting that net inflows into long-term Treasuries fell during the 2008 crash and the COVID pandemic.
“Long-term Treasury bonds may not have default risk, but they do have liquidity risk and interest rate risk: when selling the bond before maturity, the sale price is sometimes uncertain, particularly in times of financial market stress,” he said.
But failure to pay also presents another risk.
In March, a note from Richard Bernstein Advisors said spreads on credit default swaps had increased for Treasuries since 2011, when the federal government received its first credit rating downgrade. This means markets are paying more to insure against what was once unthinkable.
Then came the debt ceiling drama in the spring and the August downgrade of the US credit rating by Fitch, which cited the growing debt burden and political dysfunction.
Moody’s flagged similar issues in its warning. If a downgrade follows, then US debt will not be in the safest category in terms of default risk in any of the three major rating agencies.
Concerns about U.S. debt have grown as federal deficits continue to widen. A Penn Wharton budget model recently determined that the United States has about 20 years to change course on its debt size, or default in one form or another will be inevitable.
As concerns about debt sustainability and bond prices rise, investors have also become more nervous. Several auctions of long-term Treasuries have seen weak demand and buyers are demanding higher compensation for the risk of carrying Treasuries.
But Gennadiy Goldberg, an analyst at TD Securities, is not convinced that Treasuries are losing their safe-haven role.
“No one worries about the long-term viability of firefighters in the event of a fire, do they?” he told Insider. “They call the fire department, and the fire department is the U.S. Treasury.”
According to him, investors are willing to hold on to riskier assets as growth in the United States has remained robust. But if a risk-averse environment hits the markets and really takes off, then the situation will be very different.
“And I would be shocked if there wasn’t a safe haven to Treasuries,” he added.