Evaluation-US political brinkmanship undermines Treasuries’ safe-haven status

By Davide Barbuscia

NEW YORK (Reuters) – Investors have been flocking to U.S. Treasuries as a shelter because of market turmoil fueled by President Donald Trump’s trade policies, but a looming debt ceiling debate and ongoing political brinkmanship are stark reminders that even the world’s ultimate risk-free asset shouldn’t be resistant to cracks.

The $28.5 trillion U.S. Treasury market is the world’s largest bond market, known for its liquidity and stability, allowing investors to quickly move large sums of cash. Yet there are quite a few issues that might challenge views on the security of U.S. debt securities.

Chief amongst them is the debt ceiling, a self-imposed borrowing cap that requires congressional approval to be suspended or raised. A debt ceiling showdown in 2023 spurred a sell-off in stocks and bonds, pushed the U.S. to the brink of default and hurt its credit standing.

Rising debt levels lately have undermined the sovereign credit profile, said Monica Defend, head of Amundi Investment Institute.

“But the larger threat is the potential of a technical default because of political arguments over the debt ceiling,” Defend said. In 2023, Congress lifted the debt ceiling until January 1, 2025, meaning lawmakers must revisit the difficulty later this yr to forestall a default. Some analysts estimate the X date, when the federal government runs out of funds to fulfill all of its debt obligations, may very well be around July or August.

Meanwhile, the specter of a government shutdown, averted on the last minute last week, was a reminder for investors of the continuing congressional brinkmanship that has contributed to global rankings agencies’ moves to downgrade america’ once top-tier credit standing.

Despite Republican control of Congress, political polarization stays a key concern, as policy reforms often require bipartisan consensus, said a source at a serious rankings agency, speaking on condition of anonymity.

Harrison Fields, a White House spokesperson, said Trump is committed to restoring fiscal credibility.

The recent fall in long-term U.S. rates of interest since he returned to the White House on January 20 is an indication of market confidence in his policies, Fields said, pointing to a decline within the term premium, which measures what investors charge for holding debt for an extended time frame, as further evidence.

INSTITUTIONAL STRENGTH

Treasuries have rallied recently as Trump’s unpredictable tariff moves stoked fears of a trade war and potential recession, driving investors into the perceived safety of U.S. government debt. At the identical time, sovereign credit default swaps (CDS) – a key measure of credit risk – have edged to their highest since early November, when the associated fee of insuring against a default rose amid election and debt ceiling jitters.

“USA CDS spreads are inclined to trade at very tight levels except in periods of debt ceiling concerns. And as of today, the debt ceiling has not been raised,” said Jigar Patel, a strategist at Barclays.

Beyond political disputes, future rankings actions will depend upon clarity across the U.S. fiscal path, said the source on the rankings agency. Republicans are pushing a $4.5 trillion tax cut extension, but its impact on deficits stays uncertain without major spending cuts, which could clash with Trump’s pledges to guard social programs.

Moreover, institutional strength and government checks and balances are under scrutiny, said the source. One area of focus is how the newly established Department of Government Efficiency (DOGE), led by Elon Musk to cut back wasteful spending, might influence policy decisions and shift the balance of power inside the federal government, the source added.

Moody’s, the last major agency that rates U.S. sovereign debt at the highest triple-A rating, cut its outlook to “negative” in November 2023. Fitch downgraded the U.S. credit standing earlier that yr, following a debt ceiling standoff, while S&P Global Rankings has warned that rising deficits and political gridlock could pressure its AA+ rating.

CREDIBILITY

One other potential risk to the bond market is the Trump administration’s willingness to explore unconventional strategies to administer U.S. debt, analysts and investors said.

One idea gaining traction amongst market participants is that Trump might leverage the specter of tariffs and U.S. security alliances to influence foreign governments to swap their Treasury holdings for lower-cost century bonds.

“How that may work shouldn’t be clear, but I can’t imagine it might be good for the boldness of U.S. bondholders,” said Steven Zeng, U.S. rates strategist at Deutsche Bank.

Trump has at times criticized the Federal Reserve and pressured it to lower rates of interest. In recent weeks, Trump and Treasury Secretary Scott Bessent have pledged to contain the 10-year Treasury yield, a constructing block for the economic system and a benchmark for consumers’ borrowing costs.

“If you happen to really are concerned about keeping the 10-year low, you possibly can double down on credibility,” said Ben Harris, vice chairman and director of economic studies at Brookings, who recently served as chief economist on the Treasury Department.

This may very well be achieved by pledging to take care of the independence of the Federal Reserve, or through a timely and responsible budgeting process, he said.

“There’s an inconsistency between their stated aspiration and their policy approach,” said Harris.

(Reporting by Davide Barbuscia; Editing by Megan Davies and Andrea Ricci)

Finapress

Evaluation-US political brinkmanship undermines Treasuries’ safe-haven status

Leave a Comment Cancel Reply