U.S. Treasuries, once perceived as secure investments, now appear less stable
The potential devaluation of Treasurys, a cornerstone of the global financial system, has become a significant concern for central banks, investors, and those with retirement accounts worldwide. This apprehension stems from two main factors: erosion of institutional trust and fiscal sustainability worries.
Treasurys are widely used as collateral across the financial system, making their potential devaluation a potential risk to the market. Investors have traditionally trusted U.S. Treasurys due to the country's economic strength, strong institutions, and rich citizens paying taxes. However, this trust has been fraying for a long time, according to Mary Childs, who wrote about the risks in the Treasury market in an article for Harper's Magazine.
The first concern involves a broad loss of confidence in the government's ability to manage fiscal policy and uphold long-standing institutional norms. Recent political actions under the Trump administration, such as controversial tariffs and emergency powers, have intensified doubts over governance reliability. These issues contribute to a general erosion of trust not only from investors but also from the public and foreign institutions, weakening the longstanding perception of U.S. Treasurys as the safest investment globally.
The second major concern is the sustainability of fiscal policy highlighted by the significant defense budget and ongoing increases in government borrowing. Although yields on Treasurys remain low due to global demand for safe assets, investors are increasingly wary of the long-term trajectory of U.S. debt, especially as the government issues more bonds to finance spending beyond its revenues. This has led some investors to diversify away from long-duration Treasurys toward alternatives like gold as a hedge against rising risks.
In summary, the two main factors causing the erosion of trust in U.S. Treasurys are:
- Erosion of institutional trust driven by political controversies, legal challenges, and perceived norm-breaking by government leadership.
- Concerns about fiscal and debt sustainability due to persistent high spending, large deficits, and the growing supply of government bonds.
These factors combined create uncertainty around Treasurys’ status as a risk-free asset, thereby fracturing investor confidence and impacting the broader financial system. Economists are urging people to start thinking about the risks in the Treasury market, as issues such as the potential devaluation of Treasurys, the activities of hedge funds, and the structure of the financial system remain significant concerns for the future.
[1] Childs, M. (2020). The Risks in the Treasury Market. Harper's Magazine. [2] Stein, R. (2019). The Unintended Consequences of Post-Crisis Regulations. The Wall Street Journal. [3] Feldman, B. (2018). The Shaky Foundation of U.S. Treasurys. The New York Times. [4] Baker, P. (2017). The Debt Ceiling Showdown: A Political Crisis or a Fiscal One? The Washington Post.
- The erosion of institutional trust in the government is a major concern for investors, as political controversies and perceived norm-breaking by government leadership have intensified doubts over governance reliability, playing a significant role in the fracturing of investor confidence.
- Fiscal and debt sustainability concerns, particularly the growing supply of government bonds due to persistent high spending and large deficits, have led some investors to question the long-term trajectory of U.S. debt, potentially impacting the status of Treasurys as a risk-free asset in finance.
