No, Treasury Securities Aren’t at Risk of Losing Haven Status… Yet

Lawrence Gillum (00:00):

Over five trading sessions during the first week of April, intermediate to longer term treasury yields were sharply higher in one of the largest moves higher in yields since 2020. Moreover, U.S. treasury markets have sharply underperformed other developed government bond markets recently calling into question the relative attractiveness of U.S. treasury securities versus global alternatives. So in this edition of the LPL Street View, we take a dispassionate view to see if treasury securities really are at risk of losing their haven status. And I'm bringing the receipts, as the kids say. To say that the month of April has been a volatile month for bond markets may be the understatement of the year. Well, so far, at least. The sharp move higher in treasury yields experienced in early April started around the time when a post on X or Twitter stated that the Trump administration was considering a 90 day pause on tariff implementation that sent stock prices soaring.

Lawrence Gillum (00:54):

The Trump administration quickly refuted that claim and stocks fell. But the volatility in treasury markets was largely set in motion. Since rapid selling tends to beget more selling the move higher in yields was likely further fueled by a number of other legitimate concerns as well. Sticky inflation, a patient federal reserve, potential foreign buyer boycotts hedge fund de-leveraging, rebalancing out of bonds into cash and in illiquid treasury market. The situation was further exacerbated by a notably weak three-year treasury auction where the Treasury Department had to offer higher yields to attract demand, which still fell short of expectations. At its peak, the 10-year treasury yield surged by over 70 basis points during the week before partially recovering to end the week only 60 basis point higher. The spike higher in treasury yields caused the U.S. treasury market to significantly underperform global ex-U.S. government bond markets.

Lawrence Gillum (01:48):

This first chart highlights the relative returns of the U.S. Treasury Index versus the global ex-U.S. Treasury Index. When lines are moving higher, U.S. treasuries are outperforming, but when lines are falling, treasury securities are underperforming. And underperformed they did recently with some calling into question the relative attractiveness of U.S. treasury securities, especially during these volatile times. But when you zoom out, we've seen this price action performance before many times actually. It isn't unusual, in fact, to see non-U.S. bond markets outperform U.S. treasuries over various market conditions. So we don't think this recent price action tells us anything new either, especially about the claim that treasuries are no longer safe. But the idea of the United States losing its exceptionalism, particularly in relation to U.S. treasuries as a global safe haven asset, has been discussed in various forms for decades since the era of bell bottom pants and Atari game consoles, both awesome by the way, but treasuries losing their haven status first came up in the 1970s when Nixon took the dollar off the gold standard and then throughout the 1980s with rising budget deficits and dollar volatility. And they were called into question again in the late 1990s with the launch of the Euro and the European Union.

Lawrence Gillum (03:01):

Then you had the global financial crisis in 2008 and the U.S. debt downgrade in 2011. And finally during COVID, when treasury yields initially rose, despite the equity market selloff, which was eerily similar to what took place earlier this month, each past episode questions treasuries' haven status, yet their status persisted due to unmatched market depth, dollar centrality and geopolitical clouts. Of course, any of those reasons can change and there's no guarantee haven status will remain permanently. But perhaps the biggest rebuttal against treasury securities losing their haven status is, frankly, there are no better alternatives, at least for now. German bunds, Chinese bonds, gold, crypto, they all have structural issues that preclude them from being the global safe haven asset in our view. So despite recent volatility in our view, U.S. treasuries remain the world's preeminent safe haven asset for now anyway, underpinned by the dollar's global reserve status and the market's depth and liquidity.

Lawrence Gillum (04:00):

This month's treasury market sell off while severe does not signal a regime shift away from the status as some have suggested. Instead, we believe it mostly reflects temporary de-leveraging pressures rather than a fundamental rejection of treasury safety. Although there is no doubt foreign selling out of the U.S. dollar assets has occurred and added to this market volatility. So I want concerns about the Federal Reserve independence and potentially an unforced policy error by cutting rates too soon, and it makes sense. Longer maturity, treasury yields have continued to move higher, but if the U.S. economy does contract, and especially if it takes other economies with it, we think the U.S. bond market will remain the haven destination due to its size and liquidity. Despite this turbulence, for now treasuries remain the world's unrivaled safe haven asset with no viable alternative capable of matching their liquidity, safety, and global reach. Now, investors should view these episodes as opportunities to reassess risk management, of course, but we believe the foundational role of treasuries in portfolios remains intact. That's it for now, but for more information on global capital markets, to make sure you're following us on our social media accounts. Take care, everyone.