Investing Insights: U.S. Treasuries Lose "Safe Haven" Status During COVID-19 Pandemic
The recent behavior of U.S. Treasuries during the COVID-19 pandemic has raised doubts about their status as the world's ultimate "safe haven" securities. New research presented at the Kansas City Fed's annual research conference in Jackson Hole, Wyoming, suggests that U.S. Treasuries may not be much different from the debt issued by other countries or even large corporations.
Researchers from New York University, London Business School, and Stanford University found that investors shifted towards a "risky debt model" when pricing Treasuries in response to the pandemic. This shift challenges the long-held belief that U.S. Treasuries are a safe bet in times of global financial stress.
During the pandemic shutdown of 2020, investors did not flock to Treasuries as usual, but instead marked down their value along with bonds from other countries. The U.S. Federal Reserve intervened by buying up bonds to stabilize the market, similar to its actions during the Global Financial Crisis.
The researchers warned that in this "risky debt regime," government spending shocks could lead to significant changes in bond market valuations. Large-scale asset purchases by central banks in response to government spending increases could have negative implications for public finance, as they may inadvertently subsidize bondholders at the expense of taxpayers.
In conclusion, the findings suggest that U.S. Treasuries may not be as safe as traditionally believed, and investors should be cautious about their investments in these securities. Central banks and policymakers need to consider this shift in investor behavior when assessing the functionality of bond markets. This analysis underscores the importance of staying informed about market trends and adjusting investment strategies accordingly to protect one's finances.