The Paradox of Treasury Bonds

The recent debt ceiling drama caused Treasury bonds to be viewed as risky assets, but President Biden and Speaker Kevin McCarthy reached a deal to suspend the debt ceiling, and the Senate gave final approval on Thursday to legislation ensuring that the Treasury won’t run out of cash. What should investors take away from this crisis? According to the article, paradoxically, the best answer may be exactly what it was before this crisis: For safety, buy Treasuries.

Treasury bonds have always been a time-tested solution to investment anxiety, as investors flock to the $24 trillion Treasury market whenever they need a haven. It is the deepest market in the world and easily accessible globally. No other global asset class offers the same advantages. Furthermore, Treasury bonds are known for their safety and stability, and their full faith and credit have never been breached, as it is guaranteed by the Constitution and the country’s long history as a stable country governed by law.

Even though fissures in the Treasury bill and credit default swaps market have become more visible in recent years, and further downgrades of U.S. debt could be coming, Treasury bonds remain a safe haven in a storm. In fact, Treasuries are likely to emerge from a debt crisis as essentially what they have always been: a relatively safe place for investors to park their money.

Beyond the debt ceiling crisis, other factors dominate the bond market, such as the Federal Reserve’s long struggle to bring inflation under control by tightening monetary policy, the possibility of a recession, and the pressure on regional banks resulting from rising interest rates. Bond yields have already risen sharply over the last year, and those yields are a reasonably good predictor of bond market returns. In fact, if you hold a one-year Treasury bill for a full year, you can count on a return of more than 5 percent, which is a high threshold for riskier investments. Short-term Treasuries are more attractive compared with stocks. Longer-term bonds are a bit less attractive because of their lower yields. The yield curve is inverted, suggesting that traders expect a recession, in which the Fed would lower short-term interest rates to stimulate the economy. Recessions may be bad for most people and the stock market, but they tend to be good for Treasury bonds. Investors often seek the safety of Treasury bonds in times of market volatility, which causes Treasury prices to rise as market yields fall.