Why is the world so heavily invested in US Treasuries?

For many years, the US Treasuries have been known as safe and stable investments. They have been a popular choice for investors around the world, especially during times when the markets are unstable. These government bonds are trusted because they are backed by the full support of the US government. They have been a key part of many investment portfolios and have helped support the global financial system. However, changes in world politics—especially during Donald Trump’s presidency—are starting to challenge this trusted position. This could be a sign that the way the world economy works is beginning to change.

Role of US Treasuries in global finance

The US Treasury securities are instruments through which the federal government borrows money to fund its operations. Issued by the US Department of the Treasury, these securities range from short-term Treasury Bills (T-Bills), which mature within a year, to medium-term Treasury Notes (T-Notes) and long-term Treasury Bonds (T-Bonds) that can span up to 30 years. They are important not just for funding domestic expenditures but also for managing national debt and influencing monetary policy.

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People have always liked the US Treasuries because they are very safe and easy to buy or sell quickly. They are priced in the US dollars, and since the US controls its own money, there is very little risk that it won’t be able to pay back what it owes. In theory, the Federal Reserve (the US central bank) can always print more dollars to pay off debt. This might cause inflation, but it means the US is unlikely to default, or fail to pay back its debt, in the usual way.

Because of this strong reputation, US Treasuries are used all over the world. Central banks, big investment companies and government-owned funds keep large amounts of them. This helps keep the US dollar powerful in global markets and lets the US borrow money at lower interest rates.

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The tariff effect

However, that trust seems to have been shaken by recent events. Under President Donald Trump’s second presidency, the US put in place a number of aggressive tariffs (extra taxes on imports), which made global markets more unstable. These back-and-forth tariffs, which were introduced without much discussion with other countries, messed up supply chains around the world and made investors worry more about the stability of the US economy.

On April 8, something unexpected happened during a bigger drop in the stock market: instead of Treasury yields falling—as they usually do when investors rush to safer assets—they actually went up. Normally, when stocks go down, people buy Treasuries, which pushes prices up and yields down. But this time, yields rose, meaning people were selling government bonds even while the stock market was also falling. This was the opposite of the usual “flight to safety” pattern.

Fortune’s Alicia Adamczyk reported that this unusual behaviour raised concerns in the financial world. Some experts thought that countries like Japan might be selling their US debt because of Trump’s trade actions. Others believed hedge funds could be behind the sudden move out of bonds.

Market reactions and policy reversals

After the unusual jump in Treasury yields, President Trump announced a 90-day pause on adding new tariffs and took a softer approach with some of America’s trading partners. This helped the market recover a bit: yields on the 10-year Treasury went down to 4.35 per cent and yields on 30-year bonds also dropped.

But many experts are still cautious. Jack McIntyre, a portfolio manager at Brandywine Global told Fortune, “The damage has already been done to the US’s reputation.” Even if the tough talk on tariffs slows down for a while, investors may still not fully trust the US, especially when its economic policies seem unpredictable and based on quick reactions.

The effects are already showing. As US Treasury yields went up, yields on German government bonds went down. This means some investors are moving their money into safer European assets instead. Japanese government bonds are also getting more attention, showing that investors are spreading their money across different countries instead of relying mainly on the US.

“Year of the bond” and shifting preferences

Even though the Treasury market has been shaky, many experts are calling 2024 the “year of the bond.” A Reuters report says that global bond funds have brought in over $600 billion so far, which is a big change from 2022, when investors were pulling money out. This big increase is mostly because central banks are starting to lower interest rates as inflation slows down, making bonds with higher returns more appealing.

Corporate bonds (bonds issued by companies) have done better than many expected. Businesses have been able to handle the effects of earlier rate hikes and because corporate bonds pay more than government bonds, they’ve attracted a lot of investors. Still, corporate bonds come with more credit risk—meaning there’s a higher chance the company might not be able to pay back its debt—so some cautious investors are still unsure about putting their money into them.

Still a safe haven but with caveats

Even though Treasuries have recently been sold off, many experts say it’s not a good idea to completely stop investing in them. Alex Tsepaev, chief strategy officer at B2PRIME Group, told Fortune that it’s still too early to rule them out as one of the best ways to protect money and manage risk, along with gold. He explained that while corporate bonds with high credit ratings can give higher returns, they also come with more risk.

As a middle ground, short-term Treasury bonds could be a good option—they offer decent returns and are less likely to be affected by political or global issues. Fei Chen, CEO of Intellectia AI, also believes Treasuries are still a safe choice, but with some caution. Chen said it’s important to pay attention to how long the bond lasts and to also think about other safe government bonds from countries like Canada or Australia.

Global implications

The US Treasury market, now worth almost $29 trillion, does more than just help pay for government spending—it plays a key role in the world’s financial system. The interest rates (yields) on Treasuries affect many things, like home loan rates and how countries manage their foreign currency reserves. If people start to lose trust in the stability of Treasuries, it could make borrowing more expensive around the world—especially now, when the US is running large budget deficits and global political tensions are high.

In the end, Treasuries may still be a core part of the financial system, but the situation around them is changing. Investors no longer see them as completely risk-free. Instead, they are looking at them more carefully, thinking about global politics, unpredictable policies and the rise of other strong investment options.

In this new period, the US Treasury market is still important—but the world is not willing to overlook its risks anymore.