In a startling shift from decades of financial stability, U.S. Treasury bonds, once regarded as the most secure investment globally, are facing a crisis of confidence. Traditionally seen as a safe haven in tumultuous times, these bonds are now being shunned, raising alarms about the fiscal health of the United States.
The heart of the problem lies in a basic economic principle: an oversupply of bonds coupled with dwindling demand. The U.S. government’s increased borrowing to fund budget deficits, including ambitious programs like the CHIPS Act and student loan forgiveness, among countless others, has saturated the market. At the same time, traditional domestic and international buyers are retreating.
Nobody wants U.S. Treasury bonds.
In Semafor Business, @lizrhoffman looks at how the most tradable security in the world and a sign of the U.S.’s global economic might is badly out of favor. https://t.co/NU0JHCV2nz
— Semafor (@semafor) November 28, 2023
Auction failures and plummeting values signify this shift. Long-term Treasury bonds are experiencing a bear market not seen since the 2008 financial crisis. The Federal Reserve, in an attempt to manage inflation and stimulate economic growth, has reduced its holdings of these bonds, contributing to the glut. Meanwhile, yields demanded by investors are at their highest since 2007, reflecting growing skepticism about the bonds’ viability.
The international scenario complicates matters further. Once staunch supporters of U.S. debt, China and Japan are now sellers, primarily to support their weakening currencies. The Ukraine war and increased U.S. oil production have reduced demand from Eastern Europe and the Middle East. U.S. banks, struggling with their own challenges, have significantly reduced their Treasury holdings. This collective pullback signals a profound change in how global investors perceive U.S. debt.
Nobody seems to want US Treasury Bonds pic.twitter.com/nqL1gfArit
— Dr. Dividend 💸 (@Dividend_Dr) November 29, 2023
Even as concerns grow about the sustainability of U.S. debt, some analysts remain optimistic. They point to alternative sources of demand, such as tech companies’ cash reserves and China’s trade surplus, suggesting that the market can still function efficiently. However, this view clashes with the emerging narrative of risk and uncertainty surrounding these bonds.
The situation is further complicated by geopolitical tensions and internal political dynamics in the U.S., including the debt ceiling debates and the threat of credit downgrades. These factors contribute to the growing perception that U.S. Treasury bonds are no longer immune to liquidity and interest rate risks while free from default risk.
The US Treasury auction last week was a near-failure. They tried to borrow $24 billion by selling 30-year bonds, but the market only wanted three-quarters of them and demanded even higher rates.
This is a sign that private buyers are nearing their limit, with a tsunami of… https://t.co/Wkg3RoR4eL
— Wall Street Silver (@WallStreetSilv) November 14, 2023
Despite these challenges, some experts, like Gennadiy Goldberg from T.D. Securities, argue that in times of crisis, U.S. Treasurys will still be the refuge of choice. However, this confidence faces a stern test as markets continue to question the long-term viability of U.S. bonds amid changing economic and political landscapes.
At this juncture, the once unshakeable faith in U.S. Treasury bonds is wavering. The implications for the U.S. economy and global financial markets are profound as the nation grapples with managing its debt in an increasingly skeptical and volatile world. This shift marks a crucial moment for U.S. fiscal policy and the global perception of American economic resilience.
