For much of the past few years, U.S. Treasury bonds have failed to serve their traditional role as a definitive safe haven during global market turmoil. During the three most recent major shocks—the post-pandemic inflation surge, the imposition of tariffs by former U.S. President Donald Trump, and the recent conflict involving Iran—U.S. Treasuries provided little protection. In fact, on each occasion, they declined alongside risk assets such as stocks. In 2022, U.S. Treasuries experienced even greater losses than the Dow Jones Industrial Average.
Inflation has been a primary culprit, as rising consumer prices and energy costs erode the real value of fixed debt payments. This has also kept key Treasury yields substantially higher than their levels at the end of 2024, despite multiple interest rate cuts by the Federal Reserve since then.
However, these events also highlight a deeper and more persistent shift that analysts believe is underway: the so-called "convenience yield" that U.S. Treasuries have enjoyed in recent years is gradually weakening. Traditionally, investors have been willing to pay higher prices and accept lower returns for Treasuries due to their high liquidity, safety, and utility as collateral—a preference that has saved the U.S. government billions in annual financing costs.
Yet, this premium is widely believed to have significantly declined or even disappeared. Estimates vary, but research by Harvard Professor and former Fed economist Wenxin Du indicates that since the global financial crisis, this premium has fallen by nearly 0.5 percentage points. When compared to the debt of other major developed nations on a currency-hedged basis, it is now even negative—meaning U.S. Treasuries are effectively trading at a discount.
Du stated, "It is fair to say that bonds have become less effective as risk hedges. They are no longer classic safe-haven assets because people don’t necessarily rush into them during crises."
Of course, U.S. Treasuries have not entirely lost their "privileged status" at the core of the global economy, as no other bond market rivals their scale. They remain a cornerstone asset in globally diversified portfolios. Moreover, since the outbreak of U.S.-Iran tensions, Treasuries have outperformed many global peers, as an oil price shock is expected to hit energy-importing nations harder.
Additionally, despite speculation that friction between Trump and U.S. allies, along with his unilateral approach, might prompt foreign investors to sell U.S. assets, overseas holdings of U.S. Treasuries have continued to climb to record highs.
Lawrence Gillum, Chief Fixed Income Strategist at LPL Financial, remarked, "Concerns about U.S. debt are real and deserve attention. But talk of the 'end of U.S. Treasury exceptionalism' appears overstated for now."
However, according to researchers and the International Monetary Fund, the surge in government debt is driving a lasting shift in the market. Following Trump's tax cuts and pandemic-era fiscal stimulus, the amount of Treasuries circulating in financial markets has more than doubled over the past decade, reaching approximately $31 trillion.
Data from the U.S. Congressional Budget Office show that publicly held debt was less than 40% of U.S. GDP in 2008. It is projected to exceed 100% this year and reach 120% within the next decade, surpassing the historical peak seen during World War II.
A study published last year by Du and co-authors Ritt Keerati and Jesse Schreger indicated that for every 10-percentage-point increase in the debt-to-GDP ratio, the convenience yield of the U.S. Treasury market declines by 4 to 9 basis points.
Du noted, "U.S. Treasuries used to be very special. But what we've observed since the global financial crisis is a long-term decline in that premium. If something becomes too abundant, it loses its uniqueness."
Other indicators reflect a similar trend. Data show that the yield spread between U.S. Treasuries and bonds issued by supranational institutions such as the World Bank and the Asian Development Bank has nearly vanished. A decade ago, these institutional bonds yielded about 20 basis points more than Treasuries; today, the gap has narrowed to just 4 basis points.
Gregory Peters, Co-Chief Investment Officer at PGIM Fixed Income, said in an interview, "All else being equal, investors now demand higher returns to hold U.S. Treasuries, especially longer-dated ones." He pointed out that the combination of large deficits and policy uncertainty "has diminished the appeal of Treasuries."
At the same time, changes in the holder base are thought to have made Treasuries more volatile than in the past. Central banks, which are traditionally less sensitive to price fluctuations, now hold about 43% of foreign-owned Treasuries, down from roughly 65% a decade ago.
Private investors such as hedge funds, which often have higher return requirements and employ leverage, are playing a larger role. These strategies can sometimes force asset sales during market stress.
One consequence is that recent market shocks have often dragged down both stocks and bonds simultaneously. This stands in sharp contrast to past episodes—such as the early-1990s recession, the dot-com bubble burst, and the credit crisis—when Treasuries typically rose during market declines, providing a cushion.
For much of the past four years, the correlation between stocks and bonds has been positive, meaning they tend to move in the same direction.
Research by New York University economists Viral Acharya and Toomas Laarits found that the convenience yield of the 10-year Treasury fell sharply during the tariff shock in April of last year. A similar pattern emerged during the Iran conflict: Treasuries initially fell alongside stocks, then rebounded in tandem as cease-fire hopes boosted expectations that the conflict was nearing an end.
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