US Treasuries — typically seen as a haven during market turmoil — recently sold off when changes in US tariff policy caused financial market stress to jump.
The decline in the world’s reserve asset during an episode of elevated volatility comes as investors are increasingly focused on the US’s growing debt burden and other countries are also increasing their borrowing.
“Markets are dealing with a lot of competing factors right now — fairly significant drivers where it’s hard to trade all of them at once,” says William Marshall, head of US rates strategy in Goldman Sachs Research.
Marshall points to a host of drivers that could have contributed to the recent weakness in the price of Treasuries, including concerns about demand for US government debt, fiscal considerations, and hedge funds selling their Treasuries as they unwind leveraged trades.
More generally, the impact of tariff policies could complicate the case for owning Treasuries as a hedge against volatility, given the possibility that tariffs could drive down growth while boosting inflation, Marshall points out. In environments with potentially high inflation, Treasury yields typically rise (and prices fall) in order to compensate investors for the risk that their money will be worth less upon the bonds’ maturity.
“Yes, we are worried about growth downside risks. But that’s in the context of the potential for very high inflation. Growth and inflation moving in opposite directions erodes some of that hedging property, which makes things a little bit more complicated. So if you’re a multi-asset investor thinking about Treasuries in a portfolio context, their value is perhaps a little bit less clear cut,” Marshall says.
At the same time, the market’s focus on the implications of tariffs for US borrowing has shifted in recent weeks. Whereas investors had been focused on how much money tariffs could raise for the US budget (and therefore a potential reduction in the supply of government debt), they now seem to be more concerned about the prospect of a downturn, which could lead to higher government borrowing due to lower tax receipts and increased spending needs.
This has been reflected in Goldman Sachs Research’s Treasury convenience factor, which measures the relative valuation of Treasuries versus alternative forms of duration such as swaps or other sovereign bond markets. A lower convenience yield usually reflects a less favorable supply/demand balance for US Treasuries (or investors anticipating a shift in that direction). The Treasury convenience yield fell sharply in April as trade tensions between the US and some of its biggest trading partners increased.
Are Treasuries losing support from foreign investors?
In addition to fiscal considerations, Marshall says, some market participants have voiced the concern that tensions surrounding tariffs might be causing investors to sell Treasuries. “This broad-based approach that we saw in terms of tariff policy introduced real concern that foreign investors might meaningfully pull back their support for Treasuries in aggregate,” he says.
Marshall points out that foreign investors own around 30% of the Treasury market. “But there isn’t a lot of evidence to suggest that there was active selling from the foreign official sector — the central banks that might be relatively sensitive to these shifting political tides,” he adds.
Over the longer term, however, Marshall doesn’t rule out the potential for diversification away from dollar assets. “Dollar assets have held a pretty privileged place in the global ecosystem. And so the idea that the events of the past few months potentially dent that position to some extent is, I think, a reasonable concern to have.”
What are the global factors to consider in the context of recent Treasury volatility?
The recent signs of weakness in Treasuries have implications for other sovereign debt markets.
“We’ve seen large swings across G10 rates recently, with some correlation at times to what’s going on in the US — though not quite as consistent,” Marshall says. “Given these cross currents, I think it’s useful to bear in mind that where the US is looking at potentially a very large inflation hit coupled with meaningful growth downside risks, outside the US, the balance skews a little bit more to the growth side of things,” he adds. This could mean that the case for government debt as a hedge against volatility is somewhat stronger in non-US developed markets.
Another important consideration is the borrowing and fiscal support announced by other governments in response to geopolitical risks and the economic situation. European governments have unveiled plans to raise defense spending, which Goldman Sachs economists say will lead to higher borrowing and GDP growth.
“In terms of deficit as a share of GDP, you can make the argument that the US picture is going to remain somewhat stable at high levels, but beyond the US, the direction of travel is towards slightly larger deficits,” Marshall says.
Globally, this is likely to mean an increased supply of safe assets in the coming years, which could have knock-on effects for the Treasury market.
Is volatility in Treasuries here to stay?
Looking at the three main factors that may have driven the recent weakness in Treasuries — concerns about the path of the US economy, a reassessment of the implications of tariffs for US debt, and a possible shift away from dollar assets — Marshall concludes that the Treasury market may be past the local peak point of concern. But he adds that all three shocks could remain drivers of uncertainty in the market for some time to come.
While the 90-day delay of reciprocal tariffs allays concerns of a more severe tariff scenario in the near term, “you still have 10% tariffs across most trading partners and a significant increase for China, which is more than most investors had pencilled in at the beginning of the year,” Marshall says.
Similarly, the tension between growth and inflation in the US economy has not been resolved, the question of whether foreign investors are diversifying away from dollar assets is likely to persist, and environments of episodic concern about fiscal sustainability may be a reality for the Treasury market on a go-forward basis, Marshall says.
That said, there are also factors that could be positive for the Treasury market, such as a push for regulatory changes that could make it easier for banks to facilitate the absorption of Treasury supply.
“When I think about the landscape in two years’ time, I think that there’s a decent case to be made that there will still be some lasting headwinds to Treasuries, but that they will be offset to a degree by potential shifts in other dimensions, including policy,” Marshall says.