Treasury bonds are losing their safe-haven status, Mohamed El-Erian says
Category : research
Published Date : 12/16/2024
Former colleague Mohamed El-Erian raising the specter of US Treasuries losing their safe haven status. I think it is a legitimate risk but far from clear if there is any suitable replacement. This article suggests bitcoin which is absurd. There is no other sovereign bond or financial market that offers the size and liquidity of the US market. And any other credible alternatives will face their own issues.
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With 88% of global FX trade conducted in dollars, the USD and by proxy, US Treasuries, offer safe haven status at scale that no alternative can compete with.
However, as per my prior post on interest rates, there is a real, albeit remote, risk that the US Treasury and the Fed lose control of interest rates (due to out of control budgets, massive issuance needs, geopolitical risks, government shut downs, shifting overseas demand, etc.). Put another way, there is a risk that treasury rates disconnect from Fed policy.
Should this happen we're not only talking about rates rising uncontrollably, but rather potentially taking a wrecking ball to the very idea of fiat currency. Again, a remote, tail risk but one that shouldn't be dismissed.
The second elephant in the room is the very large, grey area, market of GSE debt. This market sits in the uncomfortable space between full faith and credit (US Treasuries, Ginnie Mae, insured CDs) and corporate debt. The US managed to thread the needle during the global financial crisis by adding enough confidence through measures such as capital guarantees, while stepping short of a full guaranty.
The first signs of Treasuries losing their safe haven status may be the markets questioning the solidity of the implicit guaranty of GSE debt. GSE debt may then be the canary in the coal mine for US Treasuries losing their safe haven status.
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