MW The world's most stable asset is losing its grip - leaving your paycheck and retirement vulnerable to inflation
By Robert Pozen
Treasury bonds are no longer guaranteed safe havens - and your spending power is on the line
Over the past 30 years, investors have responded to every global crisis by buying more U.S. Treasurys, pushing down yields and increasing bond prices dramatically. By contrast, in response to the Iran war, investors almost immediately sold U.S. Treasurys - pushing yields up sharply and causing big drops in Treasury prices. Clearly, global investors no longer see Treasurys as a guaranteed safe haven.
When the Iran attacks began on Feb. 28, the yield on the 10-year U.S. Treasury BX:TMUBMUSD10Y was 3.97%. The yield jumped to 4.23% on March 16 and 4.44% on March 27. This increase of almost half a percentage point in less than a month caused a huge drop in the price of 10-year Treasury bonds. If we assume a duration of 8.4 years for a 10-year Treasury bond, that means losing almost 4% of its value in less than a month - wiping out roughly one year of interest for bondholders
By contrast, consider the response of global investors and Treasury yields to the four main global crises in the past 30 years.
-- During the COVID-19 pandemic, the 10-year Treasury yield went from over 1.8% at the start of 2020 to under 0.6% in roughly two months and stayed around 0.65% until September 2020.
-- During the 2008-09 financial crisis, the yield on 10-year Treasurys went from just over 4% in mid-October 2008 to slightly above 2% that December.
-- After the attack on the World Trade Center towers on Sept. 11, 2001, the 10-year Treasury yield slid from around 4.8% to 4.2% in two months.
-- In response to the Asian financial crisis in June 1997, the yield on the 10-year Treasury bond fell from 6.5% to around 5.7% by the end of the year.
What explains the responses of Treasury yields to the Iran war? The supply of Treasury bonds has surged, while the historic sources of demand have weakened - leading investors to doubt the long-term attraction of U.S. government bonds.
In the last decade, the outstanding Treasury debt held by the public has more than doubled to $31 trillion from $14 trillion in 2015. And the outlook is for continued big increases in Treasury bond supply. The annual U.S. budget deficit is slated to rise sharply as the government spends more on defense and homeland security.
Moreover, both Social Security and Medicare will be confronting insolvency by 2033. Since neither Democrats nor Republicans have the political will to reform either program, something has got to give. The most likely result is that Congress will appropriate the annual shortfall in both programs, requiring the U.S. Treasury to sell even more bonds and further erode the purchasing power of the U.S. dollar DXY.
On the demand side, China has been reducing its U.S. Treasury bondholdings from $1.2 trillion in 2016 to $700 billion currently. Given the geopolitical tensions between these two superpowers, China is likely to further reduce Treasury bondholdings. At the same time, Japan has stopped building up its Treasury purchases from a baseline of $1.1 trillion in 2016. Japanese institutions are now buying more bonds of their own government as Japanese interest rates have risen from close to zero to between 2.3% and 3.75%, depending on maturities.
In addition, the long-held agreement with Saudi Arabia to recycle oil petrodollar surpluses into U.S. Treasurys has not been renewed; instead, the Gulf states are using much of their oil revenues on domestic projects. Meanwhile, India and Brazil have become leery of holding their central-banking reserves in U.S. Treasurys after Russia's U.S. dollar reserves were frozen in 2022. The U.S. share of global banking reserves has fallen to under 57% in 2025 from more than 70% in the early 2000s.
There is another possible explanation for the immediate rise in Treasury rates after the start of the Iran war: Investors feared the inflationary implications of higher oil prices following the closure of the Strait of Hormuz. But that argument is undermined by the short-term responses of Treasury rates in the closest analogous crisis: the 1973 embargo on oil shipments to the U.S. by the petroleum-exporting countries in the Middle East.
When that embargo was imposed in October 1973, the yield on 10-year U.S. Treasurys was 6.8%. But in November and December of that year, the average yield on the 10-year decreased to 6.7% for both months, as worried investors bought U.S. government bonds. Only in 1974 did the yield on U.S. Treasurys start to rise, as investors concluded that the oil embargo would lead to the end of low energy prices and much higher inflation in the U.S.
Moreover, in 1973, the U.S. was highly dependent on energy imports - and quite vulnerable to price inflation due to an oil embargo. Nevertheless, U.S. interest rates declined. Now the U.S. is a net energy exporter and is much less susceptible to price inflation from an oil-supply shock. Still, interest rates zoomed higher immediately after the attack on Iran.
Clearly, the haven status of U.S. Treasurys is rapidly deteriorating as the nation's budget deficit balloons and demand from global investors weakens. The combination of these forces will drive up interest rates on U.S. Treasurys, erode the value of the U.S. dollar and undermine the purchasing power of Americans' paychecks and retirement income.
Robert Pozen is a senior lecturer at MIT Sloan School of Management and a former president of Fidelity Investments.
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April 18, 2026 15:11 ET (19:11 GMT)
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