The Treasury Market’s Coveted Status as a Safe Haven Is Fading
Wall Street Jouirnal
August-20-2026
This year’s upward march in bond yields has many drivers, from sticky inflation to heavy AI-linked corporate borrowing.
Lurking in the background, though, is a more troubling possibility. Treasurys, long the world’s preferred “safe” asset, are looking less safe. Relative to other securities, their yields are no longer quite so low, and in moments of stress, they don’t behave like a haven.
The main reason for this is that since the pandemic, the U.S. has flooded the market with additional debt, reaching $40 trillion, including intragovernmental debt, this week. There is no sign of the flood abating.
The U.S. Treasury’s surprise announcement Wednesday that it would boost buybacks of less-liquid longer-term debt simply treats the symptoms rather than the underlying cause. The move, while reducing yields in the short run, might yet raise them in the long run by eroding the U.S.’s reputation for stability and predictability.
Treasury debt has long enjoyed a unique status globally. It is backed by the unparalleled economic and financial strength of the United States, denominated in the world’s preferred reserve currency, and overseen by strong and stable laws and institutions, in particular the Federal Reserve and the Treasury itself.
Treasurys don’t just fund the U.S. government. They are where investors and governments like to park extra cash, for example, to defend their currencies. They are used to price, hedge and collateralize countless transactions in unrelated markets.
This status brought “a safety premium,” conferring lower everyday borrowing costs for the U.S. and virtually unlimited financing capacity.
These benefits became especially apparent in the wake of the global financial crisis. U.S. borrowing soared, yet yields fell. The reason: Private borrowing collapsed, and securities once thought safe, such as triple-A rated mortgages, turned out not to be safe. The Fed and other central banks began buying their own governments’ debt.
This led to what Ricardo Caballero, an economist at the Massachusetts Institute of Technology, dubbed the “safe-asset shortage”: As investors’ demand for supersafe assets collided with a finite supply, yields plummeted.
Those conditions ended with the pandemic when inflation and interest rates rose and deficits shot up. In a recent study, Caballero finds that instead of investors accepting lower yields because Treasurys are so desirable, they are demanding higher yields; the safety premium has become an absorption premium.
One way Caballero infers this is by comparing Treasury yields to swaps, derivatives used to manage interest exposure that serve as a sort of benchmark corporate borrowing rate. Historically, Treasurys yielded less than swap rates. But recently, they have yielded more. He sees this as reflecting the greater strain dealers now bear to trade, warehouse and distribute debt.
Another clue comes from the term premium, the extra return investors demand to hold long-term bonds instead of less-volatile Treasury bills. That term premium has steadily marched higher.
Combining these two, Caballero infers that shift from a safety premium to an absorption premium explains about 0.75 percentage points of the roughly 2.5 percentage point rise in yields since 2015.
A separate study by Hanno Lustig at Stanford University comes to similar conclusions. Historically, Treasurys yielded less than AAA-corporate bonds, even after adjusting for default risk, but since 2022, that advantage has disappeared. Treasury yields were also comparable to or lower than other sovereign bonds when hedged into dollars, but have been generally higher since the pandemic.
The study, prepared for the Aspen Economic Strategy Group (of which I am a member), listed signs that investors no longer flee to the safety of Treasurys during stress periods as they once did. When stocks go down, yields now tend to go up—for example, following President Trump’s “Liberation Day” tariffs last year. News of larger deficits tends to put upward pressure on yields, Lustig found. All of this, he argues, shows Treasurys are seen as less safe.
These dynamics cannot be attributed solely to Trump, since they were under way before he took office. But he also hasn’t reversed them. Early on, Treasury Secretary Scott Bessent said Trump’s priority was lower bond yields, which influence mortgage rates. This, he said, would be achieved by lowering inflation with increased energy production, AI-driven productivity, and a lower budget deficit, which was $1.8 trillion in fiscal 2024.
Instead, the Iran war has driven up energy prices and inflation. Meanwhile, the Congressional Budget Office projects the deficit will reach $2.1 trillion this year. As a share of gross domestic, that is double the 3% target Bessent once envisioned. At the same time, corporations will issue a record $1.9 trillion in investment-grade debt this year, much of it to finance the AI build-out, according to Barclays. All of this has pushed bond yields higher instead of lower.
So rather than address the fundamentals behind higher yields, Bessent has turned to fiddling with the bond market itself. Rather than expand bond auctions, he is financing the deficit with more Treasury bills and hinted that auctions of some bonds might actually shrink. He intervened to boost the Japanese yen to keep Japanese interest rates from rising (and spilling into the U.S.) while suggesting Japan borrow from the Fed to finance yen buying without selling Treasurys.
Since the 1970s, Democratic and Republican Treasury Departments alike, rather than time the market, sought to make debt issuance “regular and predictable.” Bond sales were detailed at quarterly refundings. Buybacks, launched in 2024 to improve liquidity in little-traded issues, were similarly scheduled at the same time.
Bessent has also endorsed “regular and predictable,” yet departed from it in announcing the buyback Wednesday just two weeks after the last quarterly refunding.
The buyback caught investors offside and thus achieved its short-term goal: yields fell. But such progress might not be sustained.
If issuance and buybacks are no longer regular or predictable, bonds might become more volatile. Investors might demand a higher yield to “account for this extra unpredictability,” said Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets.
By shifting from bonds to bills, Treasury faces more rollover risk—the chance that interest rates will have risen when that debt must be refinanced.
That, however, might be a problem for a future Treasury secretary.
August-20-2026
This year’s upward march in bond yields has many drivers, from sticky inflation to heavy AI-linked corporate borrowing.
Lurking in the background, though, is a more troubling possibility. Treasurys, long the world’s preferred “safe” asset, are looking less safe. Relative to other securities, their yields are no longer quite so low, and in moments of stress, they don’t behave like a haven.
The main reason for this is that since the pandemic, the U.S. has flooded the market with additional debt, reaching $40 trillion, including intragovernmental debt, this week. There is no sign of the flood abating.
The U.S. Treasury’s surprise announcement Wednesday that it would boost buybacks of less-liquid longer-term debt simply treats the symptoms rather than the underlying cause. The move, while reducing yields in the short run, might yet raise them in the long run by eroding the U.S.’s reputation for stability and predictability.
Treasury debt has long enjoyed a unique status globally. It is backed by the unparalleled economic and financial strength of the United States, denominated in the world’s preferred reserve currency, and overseen by strong and stable laws and institutions, in particular the Federal Reserve and the Treasury itself.
Treasurys don’t just fund the U.S. government. They are where investors and governments like to park extra cash, for example, to defend their currencies. They are used to price, hedge and collateralize countless transactions in unrelated markets.
This status brought “a safety premium,” conferring lower everyday borrowing costs for the U.S. and virtually unlimited financing capacity.
These benefits became especially apparent in the wake of the global financial crisis. U.S. borrowing soared, yet yields fell. The reason: Private borrowing collapsed, and securities once thought safe, such as triple-A rated mortgages, turned out not to be safe. The Fed and other central banks began buying their own governments’ debt.
This led to what Ricardo Caballero, an economist at the Massachusetts Institute of Technology, dubbed the “safe-asset shortage”: As investors’ demand for supersafe assets collided with a finite supply, yields plummeted.
Those conditions ended with the pandemic when inflation and interest rates rose and deficits shot up. In a recent study, Caballero finds that instead of investors accepting lower yields because Treasurys are so desirable, they are demanding higher yields; the safety premium has become an absorption premium.
One way Caballero infers this is by comparing Treasury yields to swaps, derivatives used to manage interest exposure that serve as a sort of benchmark corporate borrowing rate. Historically, Treasurys yielded less than swap rates. But recently, they have yielded more. He sees this as reflecting the greater strain dealers now bear to trade, warehouse and distribute debt.
Another clue comes from the term premium, the extra return investors demand to hold long-term bonds instead of less-volatile Treasury bills. That term premium has steadily marched higher.
Combining these two, Caballero infers that shift from a safety premium to an absorption premium explains about 0.75 percentage points of the roughly 2.5 percentage point rise in yields since 2015.
A separate study by Hanno Lustig at Stanford University comes to similar conclusions. Historically, Treasurys yielded less than AAA-corporate bonds, even after adjusting for default risk, but since 2022, that advantage has disappeared. Treasury yields were also comparable to or lower than other sovereign bonds when hedged into dollars, but have been generally higher since the pandemic.
The study, prepared for the Aspen Economic Strategy Group (of which I am a member), listed signs that investors no longer flee to the safety of Treasurys during stress periods as they once did. When stocks go down, yields now tend to go up—for example, following President Trump’s “Liberation Day” tariffs last year. News of larger deficits tends to put upward pressure on yields, Lustig found. All of this, he argues, shows Treasurys are seen as less safe.
These dynamics cannot be attributed solely to Trump, since they were under way before he took office. But he also hasn’t reversed them. Early on, Treasury Secretary Scott Bessent said Trump’s priority was lower bond yields, which influence mortgage rates. This, he said, would be achieved by lowering inflation with increased energy production, AI-driven productivity, and a lower budget deficit, which was $1.8 trillion in fiscal 2024.
Instead, the Iran war has driven up energy prices and inflation. Meanwhile, the Congressional Budget Office projects the deficit will reach $2.1 trillion this year. As a share of gross domestic, that is double the 3% target Bessent once envisioned. At the same time, corporations will issue a record $1.9 trillion in investment-grade debt this year, much of it to finance the AI build-out, according to Barclays. All of this has pushed bond yields higher instead of lower.
So rather than address the fundamentals behind higher yields, Bessent has turned to fiddling with the bond market itself. Rather than expand bond auctions, he is financing the deficit with more Treasury bills and hinted that auctions of some bonds might actually shrink. He intervened to boost the Japanese yen to keep Japanese interest rates from rising (and spilling into the U.S.) while suggesting Japan borrow from the Fed to finance yen buying without selling Treasurys.
Since the 1970s, Democratic and Republican Treasury Departments alike, rather than time the market, sought to make debt issuance “regular and predictable.” Bond sales were detailed at quarterly refundings. Buybacks, launched in 2024 to improve liquidity in little-traded issues, were similarly scheduled at the same time.
Bessent has also endorsed “regular and predictable,” yet departed from it in announcing the buyback Wednesday just two weeks after the last quarterly refunding.
The buyback caught investors offside and thus achieved its short-term goal: yields fell. But such progress might not be sustained.
If issuance and buybacks are no longer regular or predictable, bonds might become more volatile. Investors might demand a higher yield to “account for this extra unpredictability,” said Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets.
By shifting from bonds to bills, Treasury faces more rollover risk—the chance that interest rates will have risen when that debt must be refinanced.
That, however, might be a problem for a future Treasury secretary.
