For much of the past few years, U.S. Treasuries have failed to serve their traditional role as a sure-fire refuge from global market meltdowns. During the last three major crises — the post-pandemic inflation shock, President Donald Trump's tariff rollout, and his war on Iran — U.S. government bonds offered little protection. In fact, each time they declined alongside risk assets like stocks. In 2022, Treasuries tumbled even more than the Dow Jones Industrial Average.
Inflation Erodes Bond Value
Inflation has been the biggest culprit, since rising consumer and energy prices erode the value of debt payments that are locked in. This has kept key bond yields pinned well above where they were in late 2024, despite several interest-rate cuts from the Federal Reserve since then. The traditional safe-haven status of Treasuries has been called into question as they no longer reliably hedge against risk.
Erosion of Convenience Yield
Analysts point to a deeper, more permanent shift: the gradual erosion of what is known as a "convenience yield" enjoyed by Treasuries. Investors were traditionally willing to pay higher prices — and accept lower payouts — because of their liquidity, safety, and usefulness as collateral. That saved the government billions each year. However, research by Wenxin Du, a Harvard professor and former Federal Reserve economist, suggests this premium has been reduced by nearly half a percentage point since the global financial crisis. It is now negative when measured against currency-hedged debt from other major developed countries, meaning Treasuries actually trade at a discount to their counterparts.
"One can argue bonds are less of a good hedge against risk," said Du. "They're just not your fly-to-safety assets because people don't necessarily fly to them over crisis."
Still a Pillar of Global Finance
Treasuries haven't lost their privileged status at the heart of the global economy, as no other bond market rivals its size. U.S. government debt continues to be a pillar of diversified investment portfolios worldwide. Since the US-Iran war started, Treasuries have outperformed many global peers because the oil-price shock is expected to hit energy-importing countries particularly hard. Moreover, despite speculation that Trump's clashes with allies would cause overseas investors to dump American assets, foreign holdings of Treasuries have continued to climb and are at record levels.
"Concerns about U.S. debt are real and deserve attention," said Lawrence Gillum, chief fixed-income strategist at LPL Financial. "But declarations of the end of Treasury exceptionalism remain, for now, exaggerated."
