New Research Raises Doubts About U.S. Treasuries’ Safe Haven Role During COVID-19 Pandemic

by

As a seasoned crypto investor with a background in economics and a keen interest in global financial markets, I find the recent research presented at the Kansas City Federal Reserve’s annual conference intriguing. Having lived through the Global Financial Crisis and witnessed the role of U.S. Treasuries as a “safe haven” asset, it’s fascinating to see this perception being challenged during the COVID-19 pandemic.

A study presented at the Kansas City Federal Reserve’s annual conference in Jackson Hole, Wyoming, challenges the traditional view of U.S. Treasuries as a “safe haven” asset, according to Ann Saphir and Howard Schneider’s report for Reuters. The research, carried out by economists from New York University, London Business School, and Stanford University, proposes that the response of U.S. Treasuries during the COVID-19 pandemic suggests a change in how these securities are evaluated, possibly bringing them closer in value to other government debts worldwide, as per Reuters’ report.

According to a study spotlighted by Reuters, during the 2020 pandemic lockdown, returns on U.S. government bonds increased alongside those of international bonds, contrary to the typical trend of investors seeking safety in treasuries during crises. Instead, investors seemed to value these bonds similarly to that of nations such as Germany, Britain, and France. This goes against the traditional understanding of the United States’ “exorbitant privilege,” a term referring to its unique ability to borrow massively on global markets even with increasing budget deficits, as reported by Reuters.

According to a recent report by Reuters, the U.S. Federal Reserve took action to address escalating bond yields by buying significant amounts of bonds, with the goal of maintaining market stability—a strategy similar to one they employed during the 2008 Financial Crisis. However, the researchers behind this study suggested that the bond market was not malfunctioning but rather reacting sensibly to the substantial government spending triggered by the pandemic, as reported by Reuters.

Researchers have voiced worries that when central banks intervene in specific scenarios, it could potentially skew the authentic financial capabilities of governments. This is because such interventions might artificially bolster bond prices at the cost of taxpayers in the short term. They caution that this situation might incentivize governments to excessively spend money, as per Reuters’ report.

The report, delivered at the Jackson Hole conference, faced criticism from U.S. Treasury officials, as per Reuters. Nellie Liang, the Under Secretary for Domestic Finance at the Treasury, asserted that the study didn’t adequately consider the unique unpredictability of the pandemic or the fact that the U.S. managed to fund its extensive fiscal response without major complications, according to Reuters. She highlighted that, despite the initial turbulence, U.S. bond yields eventually settled down, remaining stable even as deficit spending persisted.

Read More

2024-08-26 23:22