U.S. Treasuries Risk Losing Grip on Safe-Haven Status, IIF Says

(Bloomberg) -- U.S. Treasuries, traditionally a safe haven in rocky times for the global economy, appear to be losing favor while Germany and Japan are still hot picks, according to an analysis by the Institute of International Finance. 

The Washington-based IIF said in a report Thursday that the U.S. was one of few countries to see an outflow of foreign investment in government bonds in 2020, alongside Italy and Greece. 

“Our data are far from definitive,” the IIF analysts, led by Managing Director Robin Brooks, said in the report. “But because a change in how markets see Treasuries would have far-reaching consequences, the U.S. macro picture deserves far greater consideration in the debate around what happened to U.S. Treasuries in 2020.”

The analysis comes amid a renewed focus on U.S. debt. President Joe Biden signed a stopgap measure late Thursday to keep the government funded amid a polarized political debate over whether and how to raise the U.S. debt ceiling to avoid default. Treasury Secretary Janet Yellen has said the U.S. could run out of cash as soon as Oct. 18.

When there’s a flight from risky assets, investors typically run to Treasuries, pushing down yields. But in March 2020, as the pandemic took hold globally, the 10-year yield rose sharply as equities plunged. 

The IIF analysts speculate emergency quantitative easing measures by the Federal Reserve, amounting to $1.5 trillion, might have masked a longer-term trend of less trust in the safety of the U.S. bonds.

Investor worries over unsustainable U.S. debt might also be at play, IIF analysts noted, adding that further understanding of this factor is critical given that foreign flows into Treasuries have been on the decline before Covid and after the global financial crisis.

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