Are US Treasuries still the world's safety net?

US Treasuries are often described as the “risk-free asset” of the global financial system. They’re the unsexy I-owe-you agreements from Uncle Sam, America’s way of saying “lend me your money and I’ll pay you back, with interest.” And historically, that promise has held firm. The US has never defaulted on its debt, making their Treasuries the bedrock of global finance.

More than just a tool to fund government spending and the benchmark for global asset pricing, Treasuries are seen as the flight-to-safety asset in times of market stress. They’re not exciting, but that’s exactly the point. Investors prize them for their stability, predictability, and near-certainty of repayment, which is why they sit at the core of portfolios held by central banks, sovereign wealth funds, institutions, and investor portfolios.

But lately, even this pillar of certainty has come under pressure. From the lingering effects of Trump-era tariff wars to a ballooning fiscal deficit, the foundation of the US Treasury market is facing growing scrutiny. Global investors are beginning to question whether America’s political dysfunction and deteriorating fiscal outlook could erode confidence in the very asset once considered untouchable. This begs the question – are US treasuries still the safe haven investors can trust?

Key Takeaways

• Seen as the bedrock of global finance, US Treasuries are now under pressure as investors weigh rising deficits, political dysfunction, and softening foreign demand.
• April’s sharp bond selloff highlighted short-term vulnerabilities, from tariff fears to hedge fund unwinds, but also reaffirmed Treasuries’ defensive role in times of stress.
• Despite concerns, Treasuries remain a critical portfolio anchor, offering attractive yields and diversification benefits amid a potential Fed pivot and ongoing market volatility.

April 2025’s bond market rout

April saw bond market volatility spike. Long-term yields surged, and questions around fiscal sustainability re-emerged. The 10-year US Treasury yield fell as low as 3.86% on 4th April following the fallout from Trump’s “Liberation Day”, before skyrocketing as high as 4.5% a few days after. The 30-year US Treasury yield touched 5%, a level not seen since August 2007.

Several key factors are thought to have contributed to this dramatic move:

1) Trump’s Return to Tariff Rhetoric - Markets reacted sharply following Donald Trump doubling down on his promise to impose sweeping tariffs if re-elected. While trade protectionism had been a core part of his earlier campaign rhetoric, the sheer scale and conviction of these new proposals caught many investors off guard. The renewed threat of aggressive tariffs rekindled fears of another trade war at a time when global supply chains remain fragile. Such policies are viewed as inherently inflationary as they raise production costs, disrupt international commerce, and increase the likelihood of retaliatory measures. More broadly, they can weigh on long-term economic growth. The result? A jump in inflation expectations, falling consumer sentiment and a sharp selloff in long-duration Treasuries.

2) The Unwinding of the “Basis Trade” - Another technical driver of April’s volatility was the unwinding of the so-called "basis trade." This strategy, commonly used by hedge funds, involves going long Treasury bonds while shorting Treasury futures, exploiting price discrepancies between the two. These trades, which have grown to US$800 billion(1), are highly sensitive to interest rate volatility. When bond prices fall too quickly, margin calls force funds to liquidate positions, amplifying selling pressure.

3) Foreign selling and softer auction demand - Despite strong headline demand in April’s Treasury auctions, the underlying dynamics told a more cautious story. Several auctions, particularly in the short and intermediate tenors, saw weaker interest from foreign buyers and increased absorption by primary dealers, suggesting private investors and foreign institutions may be pulling back amid rising supply and fiscal concerns.(2) While final foreign holdings data of US treasuries as of April 2025 are still pending, early data suggests that foreign investors have already sold more Treasuries so far this year than they did over the entirety of 2024.(3)

A closer look at the fundamentals

While April’s events were acute, some are viewing underlying structural pressures on the Treasury Market as more chronic and concerning. These include:

1. Ballooning Government Deficits
2. Massive Refinancing Ahead
3. Changing Foreign Demand

However, it’s important to paint some context for each of these points.

Ballooning government deficits

The US federal deficit is projected to hit almost US$2 trillion in 2025, driven by persistent spending on defence, healthcare, and interest costs. Since the GFC, deficits have consistently exceeded US$500 billion, and over US$1 trillion since the pandemic. To finance this, the government has issued a record volume of Treasuries, and the growing debt burden has raised long-term concerns about the sustainability of the US fiscal trajectory. While the headline figure may seem large, deficits aren’t unusual. When normalised for economic output, the projected shortfalls are only slightly below historical standards.

Massive refinancing ahead

Around US$8 trillion in US government debt is set to mature in 2025. Much of this was issued during the ultra-low interest rate environment during COVID-19, when yields were below 1%. Now, with 10-year rates firmly above 4%, refinancing will come at a significantly higher cost. That’s why Donald Trump and Scott Bessent have shifted their attention to the bond market. While equity investors speculate about a potential “Trump Put”, the real focus for Trump seems to be bringing yields down to ease the future interest burden. Rising interest costs could increasingly crowd out other areas of government spending and place additional pressure on an already stretched fiscal position.

Changing foreign demand

Foreign institutions, once dominant buyers of Treasuries, are gradually stepping back. Japan and China remain the two largest foreign holders, collectively owning over US$2 trillion worth of US Treasuries.

While fears of foreign “dumping” of Treasuries can sound alarming, the decline in overseas ownership is not a new phenomenon. Foreign holdings have been gradually falling over the past two decades, reflecting a long-term shift rather than a sudden flight. Overall, foreign ownership has dropped from over 40% a decade ago to under 30% today.

While this trend has drawn attention, it’s worth noting that US investors still hold around 70% of Treasury debt. In other words, the bigger test of demand may come from within, not abroad. As recent Treasury data only runs through February 2025, it will be important to monitor whether any significant selling emerges in the months ahead.

Gold and the US Dollar: Signals of changing sentiment

Gold prices have surged to record highs above US$3,300 per ounce, a move that reflects more than just geopolitical risk. A growing number of investors and central banks are turning to gold as a hedge against both inflation and currency debasement, amid mounting concerns over long-term US fiscal sustainability. Despite falling by 10% since the start of the year, the US dollar has stabilised recently, helped by resilient job growth and expectations that the Fed may delay rate cuts relative to other central banks. Nonetheless, despite Trump's pro-growth agenda initially being viewed as supportive for the US dollar, the currency could still face headwinds. A worsening fiscal outlook or the return of Trump-era trade policies aimed at weakening the dollar could reintroduce downward pressure on the greenback.

Gold’s rally could signal a deeper loss of confidence in fiat currencies. Central banks, especially in emerging markets, have been accumulating gold at the fastest pace in decades as part of a broader de-dollarisation trend.(4) This shift supports the view that gold, alongside Treasuries, can serve as a valuable portfolio hedge, offering both liquidity and protection in periods of fiscal or monetary instability. Even with dollar softness, US Treasuries can still remain a shock absorber in volatile markets. By introducing typical global share portfolio to both a 5% allocation to gold and 5% allocation to US Treasuries, investors can potentially improve their overall risk-adjusted returns by dampening portfolio volatility without compromising returns.

Are US Treasuries still investable?

Despite recent volatility and growing structural concerns, we believe the answer remains a resounding yes. Despite some structural headwinds that the US Treasury market may face, investors who abandon Treasuries altogether may miss out on their enduring benefits of portfolio diversification and income.

Yes, the 2022 rate hiking cycle caused meaningful drawdowns in Treasury markets (long-term Treasuries fell by up to 45%) and correlations between bonds and equities spiked, challenging their traditional role as a hedge. However, more recently, those correlations have normalised and returned to their long-term inverse relationship.

In periods of market stress, like April’s equity selloff, Treasuries held relatively steady during the month, reaffirming their defensive utility.

Treasuries can still act as a ballast in diversified portfolios. Historically, they’ve provided stability during recessions, financial shocks, or geopolitical crises. With much of the curve now yielding above 4%, they offer the most attractive income opportunity since 2007. Investors easing into duration could prove valuable in the coming months. Should the Fed shift toward rate cuts in response to slower growth or softer inflation, longer-duration Treasuries are well-positioned to benefit. That said, we see most value in the belly of the curve, where intermediate-dated bonds offer a balance between yield and interest rate sensitivity, in case the Fed does pivot given some of the economic sensitivities and inflation not being 100% put back in the bottle.

ETF flows reinforce this positioning. While long-duration bonds have seen more than AU$1 billion in outflows globally, demand remains strong for short- and intermediate-term Treasury ETFs, contributing to over AU$78 billion in net flows into the broader category.

Finally, no other asset class matches US Treasuries in terms of scale, liquidity, and credit quality. They remain the cornerstone of the global financial system and despite rising scrutiny, they continue to play an irreplaceable role in investment portfolios.

Conclusion

While some headlines paint the US Treasury market as being on the brink of collapse amid fiscal strain, rising yields, shifting foreign demand, and Trump’s perceived recklessness, the reality is far more nuanced. The recent repricing in Treasury yields reflects a realignment of investor positioning and an adjustment to evolving economic and policy dynamics, rather than a complete collapse in confidence. Despite near-term headwinds, the strategic case for US Treasuries remains intact. They continue to offer attractive advantages: depth, liquidity, creditworthiness, diversification, and now, the most compelling income opportunity for the asset class in over a decade. For long-term investors, Treasuries remain a foundational asset, capable of anchoring portfolios through potential market volatility. In a world where the term “uncertainty” has become a certainty, having a defensive ballast may be necessary for building portfolio resilience.

Related funds

Global X US Treasury Bond (Currency Hedged) ETF (ASX: USTB) invests in US Treasuries across the yield curve while providing currency hedging.

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