MacroscopeAs US debt piles up, what happens if faith in Treasuries is shaken?

The sell-off last year was the first sign of something amiss, raising concerns that US government bonds failed to behave like a safe-haven asset

As central banks start to diversify away from Treasuries and markets reassess their positions, the risk is that Treasury yields could soar, igniting inflation amid tottering debt

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The US Capitol building below an overcast sky in Washington on April 29. The government narrowly avoided a historic default after the Senate approved legislation to temporarily raise the debt limit. Photo: AFP

Published: 3:00am, 11 Oct 2021

Tina, an acronym for “there is no alternative”, has been a tenet of faith in US debt and equity markets for so long that continuance of the situation is taken for granted by most investors. But what if allegiance to Tina is faltering along with the inexorable rise in US government debt?

The US$14 trillion Treasuries market is the biggest of its kind in the world and by virtue of its size and liquidity is critical to the functioning of the global financial system. As such, it is assumed to be indispensable but this depends upon the financial integrity of the US as a sovereign borrower.

The Institute of International Finance (IIF) has noted that on recent occasions, US Treasuries have “stopped behaving like a safe haven asset”. This has been dismissed as a technicality, yet, the IIF said, “it is at least possible that something more serious may be under way”.

“The US in 2020 saw foreign outflows from Treasuries, which is notable because as a safe haven asset they should have seen inflows at a time of heightened risk aversion. Foreign inflows picked up this year but [they] are not reassuring for a purported safe haven asset.”

Markets appear to be reassessing the status of Treasury debt as US government borrowing continues to soar. Leading central banks including the People’s Bank of China and Bank of Russia have been diversifying their holdings of international reserves away from US Treasuries for some time, according to Hung Tran, a non-resident senior fellow at the Atlantic Council in Washington and a former chief economist and managing director at the IIF. This is a response to geopolitical considerations and it will continue for now, suggests Tran.

Such comments, even from an institution such as the IIF which speaks for some of the biggest financial institutions in the Western world, tend to be obscured by commentators eager to highlight the global financial crisis that China’s Evergrande problem is supposed to be heralding.