Those who have long looked to US Treasurys as a safe haven in times of uncertainty, fear, and panic may be rethinking their strategy following a historic bond sell-off and rising default fears.
As markets debate the risks lurking in Treasurys, prominent voices are raising doubts. Moody’s recent lowering of the US credit outlook to “negative” signals a possible future downgrade, and massive deficits have sent debt soaring. Furthermore, the Federal Reserve’s rate hikes have triggered a historic sell-off in US bonds, highlighting the vulnerability of prices.
Economist Mohamed El-Erian told CNBC that some are losing confidence in government bonds as a safe asset due to interest-rate risk, while Seema Shah of Principal Asset stated that it’s difficult to say with conviction that Treasurys are a safe haven given the numerous forces at play in the bond space.
According to a Dallas Federal Reserve paper, buyers view short-duration T-bills as the true safe haven, emphasizing that net inflows in long-dated Treasurys fell during the 2008 crash and COVID pandemic. The paper also noted that long-term Treasury bonds may have no default risk, but they do carry liquidity and interest rate risks, particularly during financial market stress.
Spreads on credit default swaps for Treasurys have climbed since 2011, signaling that markets are paying more to insure against potential default. The debt-ceiling drama and US credit downgrade in August added to concerns about the rising debt burden and political dysfunction.
With alarms growing about US debt, investors have turned more skittish, resulting in weak demand for long-dated Treasurys at recent auctions. Additionally, buyers are demanding higher compensation for carrying Treasurys as the concerns over debt sustainability and bond prices mount.
Despite these challenges, TD Securities analyst Gennadiy Goldberg remains convinced that Treasurys are still a safe haven, comparing them to the fire department in a time of crisis. He believes that in a risk-off environment, a safe-haven flight into Treasurys is likely.
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