Research presented at the Kansas City Federal Reserve’s annual conference in Jackson Hole, Wyoming, has questioned the long-held perception of U.S. Treasuries as the ultimate “safe haven” asset, according to a report by Ann Saphir and Howard Schneider for Reuters. The study, conducted by economists from New York University, London Business School, and Stanford University, suggests that the behavior of U.S. Treasuries during the COVID-19 pandemic indicates a shift in how these securities are valued, potentially aligning them more closely with other global sovereign debts, Reuters reported.
The research highlighted by Reuters found that, during the 2020 pandemic shutdown, yields on U.S. Treasuries spiked in tandem with those of other global bonds rather than benefiting from a flight to safety as seen in previous crises. Instead of flocking to treasuries, investors marked them down similarly to the debt of countries like Germany, Britain, and France. This challenges the notion of the “exorbitant privilege” that the U.S. has enjoyed, which refers to its ability to borrow extensively on global markets despite rising deficits, as reported by Reuters.
Reuters further reported that the U.S. Federal Reserve responded to the rising Treasury yields by purchasing large quantities of bonds, aiming to stabilize the market—a move reminiscent of its actions during the Global Financial Crisis. However, the study’s authors argued that the bond market was not dysfunctional but was instead rationally adjusting to the massive government spending in response to the pandemic, Reuters noted.
The researchers raised concerns that central bank interventions in such situations might distort the true fiscal capacity of governments by temporarily supporting bond prices at the expense of taxpayers. They suggested that this could encourage governments to overspend, as reported by Reuters.
The paper, presented at the Jackson Hole conference, received pushback from U.S. Treasury officials, according to Reuters. Treasury Under Secretary for Domestic Finance Nellie Liang argued that the study did not fully account for the unprecedented uncertainty of the pandemic or the fact that the U.S. successfully financed its massive fiscal response without significant issues, Reuters reported. She pointed out that despite the initial disruptions, U.S. bond yields eventually stabilized, even as deficit spending continued.
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