Our bi-weekly Opinion provides you with latest updates and analysis on major capital market and financial investment industry issues.
Reassessing the Safe Asset Status of US Treasuries
Publication date Jun. 10, 2025
Summary
The recent episode of market volatility in April this year has reignited questions about the status of US Treasuries as the world’s principal safe asset. These concerns stem from growing structural vulnerabilities in the US Treasury market, including worsening fiscal conditions driven by the Trump administration’s renewed push to extend tax cuts, the risk of radical exchange rate and financial policies, and heightened threats to the Federal Reserve’s independence. As a result, global investors are increasingly turning to alternative safe assets, most notably German Bunds, while discussions around issuing EU common bonds have gained new momentum. If EU safe assets are introduced, they would undermine the dominance of the US as the primary provider of safe assets. This shift is expected to enhance the role of financial markets in disciplining the US government.
In April 2025, the US Treasury market experienced heightened volatility, with the 10-year yield rising by nearly 50 basis points within a week, driven by concerns over liquidity risks associated with hedge funds. Although market conditions stabilized following the Trump administration’s announcement of a suspension of reciprocal tariffs, volatility remains elevated and could resurface depending on shifts in US policy stance or economic indicators. Reflecting on these developments, Summers (2025) remarked that the US Treasury market had begun to resemble that of an emerging economy.1)
Although the triggers of the recent turmoil remain uncertain, the unwinding of leveraged positions by hedge funds, particularly those involved in swap spreads or basis trades, may have played a significant role in the market volatility. A narrow view may interpret the yield spike as a transitory price dislocation, stemming from failed trades based on misaligned expectations.2) However, a broader interpretation, as advanced by Krugman (2025) and Eichengreen (2025),3) and echoed by several market participants,4) sees this development as indicative of a more fundamental erosion in the safe-haven status of US Treasuries.
According to Brunnermeier et al. (2016)5) and Bletzinger et al. (2022),6) safe assets must exhibit high credit quality and liquidity, retain their value even in crises, and be denominated in a currency with stable purchasing power. Historically, both short- and long-term US Treasuries have met these criteria, serving as the primary global safe asset during periods of financial stress. However, in March 2020, amid the escalation of the COVID-19 crisis, a dash for cash by financial institutions led to sharp price declines in US Treasuries, placing the US Treasury market under strain. The recent market volatility has further reignited questions over their status as safe assets. These episodes stem from growing structural vulnerabilities in the Treasury market under the Trump administration’s second term. The following section examines the underlying drivers of this shift.
Mounting vulnerability in the US Treasury market
The recent instability in the US Treasury market reflects several factors, the most prominent of which is the growing deterioration in fiscal sustainability. The Trump administration is seeking to make permanent the Tax Cuts and Jobs Act (TCJA), which is scheduled to expire this year. The TCJA introduced the most substantial corporate tax reduction in US history and has substantially weighed on fiscal conditions. According to the Congressional Budget Office (CBO), a permanent extension of the TCJA would increase the federal debt-to-GDP ratio by an additional 10 percentage points over the next decade and by 47 percentage points over the next 30 years. These negative projections have already affected US sovereign credit ratings. Fitch downgraded the US rating in August 2024, followed by Moody’s in May 2025. In its most recent downgrade, Moody’s cited the revenue loss implications of the TCJA, estimating that a permanent extension would add $4 trillion to the federal debt over the next decade, excluding interest costs.7) As a result of these downgrades, the US no longer holds a top-tier sovereign credit rating from all three major agencies, further weakening the longstanding perception of US Treasuries as the global benchmark safe asset.
Another major source of market anxiety is the risk of radical exchange rate and financial policies by the Trump administration. Stephen Miran, Chair of the Council of Economic Advisers, has advocated for a weaker US dollar to restore US manufacturing competitiveness.8) His proposals include pursuing bilateral or multilateral agreements, such as a "Mar-a-Lago Accord", to pressure key trading partners into currency appreciation by leveraging trade or defense policies. In a 2024 policy proposal, Miran also proposed encouraging foreign governments to reduce or liquidate their holdings of US dollar-denominated assets, including Treasuries, from their foreign exchange reserves.9) As of February 2025, foreign governments held approximately 14% of total outstanding US Treasuries, a smaller share than that held by private investors. However, the recent market volatility was triggered by a far smaller segment of the market: hedge fund positions.10) Consequently, policy moves that pressure those holding Treasuries as their foreign reserves could introduce significant disruption in the US Treasury market. Notably, many economies have already begun diversifying their foreign exchange portfolios and gradually reducing their exposure to dollar-denominated assets (see Figure 1). If the administration’s policies undermine the investment appeal of Treasuries, they could accelerate the ongoing trend of foreign reserve diversification.
A growing threat to the Fed’s independence has also contributed to the recent Treasury market instability. In April 2025, President Trump publicly stated that he was considering the dismissal of Fed Chair Jerome Powell, while the administration has exerted both direct and indirect pressure on the Fed to lower interest rates. Consistent with these views, Miran (2024) further proposed that the Fed actively pursue a dollar depreciation policy by purchasing foreign currency–denominated assets, particularly foreign sovereign bonds. Such interference poses a direct challenge to the Fed’s institutional independence, which is founded on its dual mandate of price stability and maximum employment. A weakening of the Fed’s independence would hinder the Fed’s ability to respond effectively to inflationary pressures, while undermining the consistency of its policy guidance or monetary policy stance. The resulting erosion in policy predictability could in turn heighten volatility in the Treasury market. This risk may be further amplified by the scheduled end of Chair Powell’s term. If his successor adopts a more administration-aligned stance on monetary policy, the Treasury market could face renewed instability.
Exploring alternatives and implications
The declining appeal of US Treasuries has prompted investors to diversify into alternative safe assets, including physical assets such as gold and high-credit government bonds such as German government bonds (Bunds). Following the Trump administration’s announcement of reciprocal tariffs on April 2, German Bunds, widely regarded as the close substitute for US Treasuries, have experienced declining yields and stable CDS spreads (see Figures 2 and 3). This divergence underscores a growing investor preference for jurisdictions with stronger adherence to the rule of law and more credible economic policy frameworks.11)
Despite their favorable specifications, as of end-March 2025, the German Bund market remains significantly smaller in scale, with an outstanding balance of approximately €1.8 trillion compared to $28 trillion in US Treasuries. As such, there is no immediate alternative that matches US Treasuries. However, recurring instability in the Treasury market has increased the likelihood of a structural reconfiguration in the global safe asset landscape. In this context, renewed attention has turned to the potential issuance of European common bonds, or EU bonds. Although such bond issuance was previously discussed,12) the idea has gained increased traction following Draghi (2024),13) who advocated for expanding investment in eurozone public goods and financing it through jointly guaranteed EU bonds to enhance European competitiveness. These bonds would facilitate the mutualization of debt among EU member states for investment in public goods. In addition, if backed by high credit quality and liquidity, EU bonds could offer lower borrowing costs than national-level bond issuance, further strengthening their appeal.14)
That said, significant obstacles remain to the issuance of EU bonds, primarily stemming from the divergent interests of member states. Janse et al. (2025) highlight skepticism regarding whether the proceeds from such bonds would be allocated effectively to EU-wide public goods. Additional concerns include the unequal distribution of benefits, disproportionate debt burdens among countries, and increased tax liabilities resulting from an overall expansion in sovereign debt. Given that political consensus is a precondition, progress toward issuance would be slow and gradual.
However, the EU has already demonstrated its capacity to issue highly rated common bonds through temporary programs such as the Support to mitigate Unemployment Risks in an Emergency (SURE) and the Next Generation EU (NGEU) in response to the COVID-19.15) Momentum is now building toward formalizing common bond issuance, creating favorable conditions for assessing its feasibility. Since the start of the Trump administration’s second term, support for regular issuance has intensified, driven by declining confidence in US political and economic stability, as well as the EU’s plans to significantly expand joint defense spending.16) In late March 2025, the General Board of the European Systemic Risk Board (ESRB), the EU’s primary macroprudential authority, also emphasized the need for the European safe asset.17) As consensus broadens, both political and working-level discussions are expected to gain traction.
For now, it remains difficult to envisage how the global financial system will evolve following the introduction of EU common bonds. Nevertheless, their emergence as a viable alternative would likely increase the sensitivity of Treasury yields to economic policy and developments in the US. Considering that bond market volatility played a key role in the resignation of UK Prime Minister Liz Truss and the Trump administration’s reciprocal tariff suspension,18) the evolving financial landscape could strengthen market discipline on the US government. If the US loses its exclusive role as the primary safe asset provider, it may face heightened pressure to maintain rationality and consistency in its policy decisions.
1) Summers, L., 2025, Top economist Larry Summers: U.S. Treasuries were trading ‘like those of an emerging market nation’, Forbes
2) Anticipating that the Trump administration’s deregulatory stance would lead to a near-term easing of the Supplementary Leverage Ratio (SLR) regulation, hedge funds appear to have made large-scale investments expecting a rise in US Treasury prices (i.e., a decline in yields) (Bloomberg, April 9, 2025, Tariffs turbocharge collapse of favored hedge-fund rates bet).
3) Krugman, P., 2025, Tariff-induced recession risk, Goldman Sachs Top of Mind; Eichengreen, B. 2025, Sterling’s past and the dollar’s future, Project Syndicate.
4) CNBC, April 9, 2025, Investors flee to German bonds as Trump tariffs spark Treasury sell-off; Financial Times, Apr. 9, 2025, US Treasuries sell-off deepens as ‘safe haven’ status challenged; Reuters, Apr. 18, 2025, PIMCO bearish on dollar, long-term Treasuries as US safe-haven status wavers.
5) Brunnermeier, M.K., Langfield, S., Pagano, M., Reis, R., Van Nieuwerburgh, S., Vayanos, D., 2016, ESBies: Safety in the tranches, European Systemic Risk Board Working Paper Series 21.
6) Bletzinger, T., Greif, W., Schwaab, B., 2022, Can EU bonds serve as euro-denominated safe assets? ECB Working paper series No 2712.
7) https://ratings.moodys.com/ratings-news/443154
8) Miran, S., 2024, A user’s guide to restructuring the global trading system
9) One of the proposals advanced by Miran (2024) is that the President invoke the International Emergency Economic Powers Act (IEEPA) to impose a user fee on foreign holdings of US Treasuries.
10) According to data from the US Treasury’s Office of Financial Research, hedge fund holdings of US Treasuries totaled approximately USD 3 trillion as of end-2024 (figures below refer to the same period). Among these, hedge funds employing relative value strategies, including basis trades and swap spread positions, which are widely viewed as central to the recent market instability, accounted for an estimated USD 1 trillion (Financial Times, April 25, 2025, How the Treasury market got hooked on hedge fund leverage). As of end-2024, foreign holdings of US Treasuries as official reserve assets stood at approximately USD 3.8 trillion, nearly four times the size of hedge fund exposure.
11) Financial Times, April 19, 2025, German bonds rise with euro as investors head for Europe’s haven
12) Bank of France, 2021, A European safe asset: New perspectives, Bulletin 234/6; Bloomberg, January 26, 2024, ECB’s Panetta sees common safe asset as crucial for Europe.
13) A report published by the European Commission in September 2024, is commonly referred to as the “Draghi Report” and officially titled The Future of European Competitiveness.
14) Janse, K.A., Beetsma, R., Buti, M., Regling, K., Thygesen, N., 2025, Gaining efficiencies by financing European public goods together, Vox EU.
15) Under the SURE program (2020–2022), the EU issued EUR 100 billion in European common bonds, followed by EUR 806.9 billion under the Next Generation EU (NGEU) program (2021–2026). These bonds have received top-tier credit ratings (Fitch: AAA, Moody’s: Aaa, S&P: AA+).
16) Bloomberg, February 19, 2025, How the EU can capitalize on America’s economic chaos; Reuters, February 26, 2025, Markets eye new wave of joint European bonds in rush to boost defence; Bloomberg, April 23, 2025, US chaos is an opportunity Europe should seize; Financial times, May 5, 2025, Trump has created a chance for the euro to rival the dollar.
17) https://www.esrb.europa.eu/news/pr/date/2025/html/esrb.pr250403~02f9ee518f.en.html
18) https://edition.cnn.com/2025/04/11/business/bond-market-trump-treasury-yield-rates,
https://www.cnbc.com/video/2025/05/08/trump-understands-if-he-loses-the-bond-market-his-whole-agenda-goes-in-the-wastebasket-joe-amato.html
Although the triggers of the recent turmoil remain uncertain, the unwinding of leveraged positions by hedge funds, particularly those involved in swap spreads or basis trades, may have played a significant role in the market volatility. A narrow view may interpret the yield spike as a transitory price dislocation, stemming from failed trades based on misaligned expectations.2) However, a broader interpretation, as advanced by Krugman (2025) and Eichengreen (2025),3) and echoed by several market participants,4) sees this development as indicative of a more fundamental erosion in the safe-haven status of US Treasuries.
According to Brunnermeier et al. (2016)5) and Bletzinger et al. (2022),6) safe assets must exhibit high credit quality and liquidity, retain their value even in crises, and be denominated in a currency with stable purchasing power. Historically, both short- and long-term US Treasuries have met these criteria, serving as the primary global safe asset during periods of financial stress. However, in March 2020, amid the escalation of the COVID-19 crisis, a dash for cash by financial institutions led to sharp price declines in US Treasuries, placing the US Treasury market under strain. The recent market volatility has further reignited questions over their status as safe assets. These episodes stem from growing structural vulnerabilities in the Treasury market under the Trump administration’s second term. The following section examines the underlying drivers of this shift.
Mounting vulnerability in the US Treasury market
The recent instability in the US Treasury market reflects several factors, the most prominent of which is the growing deterioration in fiscal sustainability. The Trump administration is seeking to make permanent the Tax Cuts and Jobs Act (TCJA), which is scheduled to expire this year. The TCJA introduced the most substantial corporate tax reduction in US history and has substantially weighed on fiscal conditions. According to the Congressional Budget Office (CBO), a permanent extension of the TCJA would increase the federal debt-to-GDP ratio by an additional 10 percentage points over the next decade and by 47 percentage points over the next 30 years. These negative projections have already affected US sovereign credit ratings. Fitch downgraded the US rating in August 2024, followed by Moody’s in May 2025. In its most recent downgrade, Moody’s cited the revenue loss implications of the TCJA, estimating that a permanent extension would add $4 trillion to the federal debt over the next decade, excluding interest costs.7) As a result of these downgrades, the US no longer holds a top-tier sovereign credit rating from all three major agencies, further weakening the longstanding perception of US Treasuries as the global benchmark safe asset.
Another major source of market anxiety is the risk of radical exchange rate and financial policies by the Trump administration. Stephen Miran, Chair of the Council of Economic Advisers, has advocated for a weaker US dollar to restore US manufacturing competitiveness.8) His proposals include pursuing bilateral or multilateral agreements, such as a "Mar-a-Lago Accord", to pressure key trading partners into currency appreciation by leveraging trade or defense policies. In a 2024 policy proposal, Miran also proposed encouraging foreign governments to reduce or liquidate their holdings of US dollar-denominated assets, including Treasuries, from their foreign exchange reserves.9) As of February 2025, foreign governments held approximately 14% of total outstanding US Treasuries, a smaller share than that held by private investors. However, the recent market volatility was triggered by a far smaller segment of the market: hedge fund positions.10) Consequently, policy moves that pressure those holding Treasuries as their foreign reserves could introduce significant disruption in the US Treasury market. Notably, many economies have already begun diversifying their foreign exchange portfolios and gradually reducing their exposure to dollar-denominated assets (see Figure 1). If the administration’s policies undermine the investment appeal of Treasuries, they could accelerate the ongoing trend of foreign reserve diversification.
A growing threat to the Fed’s independence has also contributed to the recent Treasury market instability. In April 2025, President Trump publicly stated that he was considering the dismissal of Fed Chair Jerome Powell, while the administration has exerted both direct and indirect pressure on the Fed to lower interest rates. Consistent with these views, Miran (2024) further proposed that the Fed actively pursue a dollar depreciation policy by purchasing foreign currency–denominated assets, particularly foreign sovereign bonds. Such interference poses a direct challenge to the Fed’s institutional independence, which is founded on its dual mandate of price stability and maximum employment. A weakening of the Fed’s independence would hinder the Fed’s ability to respond effectively to inflationary pressures, while undermining the consistency of its policy guidance or monetary policy stance. The resulting erosion in policy predictability could in turn heighten volatility in the Treasury market. This risk may be further amplified by the scheduled end of Chair Powell’s term. If his successor adopts a more administration-aligned stance on monetary policy, the Treasury market could face renewed instability.
Exploring alternatives and implications
The declining appeal of US Treasuries has prompted investors to diversify into alternative safe assets, including physical assets such as gold and high-credit government bonds such as German government bonds (Bunds). Following the Trump administration’s announcement of reciprocal tariffs on April 2, German Bunds, widely regarded as the close substitute for US Treasuries, have experienced declining yields and stable CDS spreads (see Figures 2 and 3). This divergence underscores a growing investor preference for jurisdictions with stronger adherence to the rule of law and more credible economic policy frameworks.11)
Despite their favorable specifications, as of end-March 2025, the German Bund market remains significantly smaller in scale, with an outstanding balance of approximately €1.8 trillion compared to $28 trillion in US Treasuries. As such, there is no immediate alternative that matches US Treasuries. However, recurring instability in the Treasury market has increased the likelihood of a structural reconfiguration in the global safe asset landscape. In this context, renewed attention has turned to the potential issuance of European common bonds, or EU bonds. Although such bond issuance was previously discussed,12) the idea has gained increased traction following Draghi (2024),13) who advocated for expanding investment in eurozone public goods and financing it through jointly guaranteed EU bonds to enhance European competitiveness. These bonds would facilitate the mutualization of debt among EU member states for investment in public goods. In addition, if backed by high credit quality and liquidity, EU bonds could offer lower borrowing costs than national-level bond issuance, further strengthening their appeal.14)
That said, significant obstacles remain to the issuance of EU bonds, primarily stemming from the divergent interests of member states. Janse et al. (2025) highlight skepticism regarding whether the proceeds from such bonds would be allocated effectively to EU-wide public goods. Additional concerns include the unequal distribution of benefits, disproportionate debt burdens among countries, and increased tax liabilities resulting from an overall expansion in sovereign debt. Given that political consensus is a precondition, progress toward issuance would be slow and gradual.
However, the EU has already demonstrated its capacity to issue highly rated common bonds through temporary programs such as the Support to mitigate Unemployment Risks in an Emergency (SURE) and the Next Generation EU (NGEU) in response to the COVID-19.15) Momentum is now building toward formalizing common bond issuance, creating favorable conditions for assessing its feasibility. Since the start of the Trump administration’s second term, support for regular issuance has intensified, driven by declining confidence in US political and economic stability, as well as the EU’s plans to significantly expand joint defense spending.16) In late March 2025, the General Board of the European Systemic Risk Board (ESRB), the EU’s primary macroprudential authority, also emphasized the need for the European safe asset.17) As consensus broadens, both political and working-level discussions are expected to gain traction.
For now, it remains difficult to envisage how the global financial system will evolve following the introduction of EU common bonds. Nevertheless, their emergence as a viable alternative would likely increase the sensitivity of Treasury yields to economic policy and developments in the US. Considering that bond market volatility played a key role in the resignation of UK Prime Minister Liz Truss and the Trump administration’s reciprocal tariff suspension,18) the evolving financial landscape could strengthen market discipline on the US government. If the US loses its exclusive role as the primary safe asset provider, it may face heightened pressure to maintain rationality and consistency in its policy decisions.
1) Summers, L., 2025, Top economist Larry Summers: U.S. Treasuries were trading ‘like those of an emerging market nation’, Forbes
2) Anticipating that the Trump administration’s deregulatory stance would lead to a near-term easing of the Supplementary Leverage Ratio (SLR) regulation, hedge funds appear to have made large-scale investments expecting a rise in US Treasury prices (i.e., a decline in yields) (Bloomberg, April 9, 2025, Tariffs turbocharge collapse of favored hedge-fund rates bet).
3) Krugman, P., 2025, Tariff-induced recession risk, Goldman Sachs Top of Mind; Eichengreen, B. 2025, Sterling’s past and the dollar’s future, Project Syndicate.
4) CNBC, April 9, 2025, Investors flee to German bonds as Trump tariffs spark Treasury sell-off; Financial Times, Apr. 9, 2025, US Treasuries sell-off deepens as ‘safe haven’ status challenged; Reuters, Apr. 18, 2025, PIMCO bearish on dollar, long-term Treasuries as US safe-haven status wavers.
5) Brunnermeier, M.K., Langfield, S., Pagano, M., Reis, R., Van Nieuwerburgh, S., Vayanos, D., 2016, ESBies: Safety in the tranches, European Systemic Risk Board Working Paper Series 21.
6) Bletzinger, T., Greif, W., Schwaab, B., 2022, Can EU bonds serve as euro-denominated safe assets? ECB Working paper series No 2712.
7) https://ratings.moodys.com/ratings-news/443154
8) Miran, S., 2024, A user’s guide to restructuring the global trading system
9) One of the proposals advanced by Miran (2024) is that the President invoke the International Emergency Economic Powers Act (IEEPA) to impose a user fee on foreign holdings of US Treasuries.
10) According to data from the US Treasury’s Office of Financial Research, hedge fund holdings of US Treasuries totaled approximately USD 3 trillion as of end-2024 (figures below refer to the same period). Among these, hedge funds employing relative value strategies, including basis trades and swap spread positions, which are widely viewed as central to the recent market instability, accounted for an estimated USD 1 trillion (Financial Times, April 25, 2025, How the Treasury market got hooked on hedge fund leverage). As of end-2024, foreign holdings of US Treasuries as official reserve assets stood at approximately USD 3.8 trillion, nearly four times the size of hedge fund exposure.
11) Financial Times, April 19, 2025, German bonds rise with euro as investors head for Europe’s haven
12) Bank of France, 2021, A European safe asset: New perspectives, Bulletin 234/6; Bloomberg, January 26, 2024, ECB’s Panetta sees common safe asset as crucial for Europe.
13) A report published by the European Commission in September 2024, is commonly referred to as the “Draghi Report” and officially titled The Future of European Competitiveness.
14) Janse, K.A., Beetsma, R., Buti, M., Regling, K., Thygesen, N., 2025, Gaining efficiencies by financing European public goods together, Vox EU.
15) Under the SURE program (2020–2022), the EU issued EUR 100 billion in European common bonds, followed by EUR 806.9 billion under the Next Generation EU (NGEU) program (2021–2026). These bonds have received top-tier credit ratings (Fitch: AAA, Moody’s: Aaa, S&P: AA+).
16) Bloomberg, February 19, 2025, How the EU can capitalize on America’s economic chaos; Reuters, February 26, 2025, Markets eye new wave of joint European bonds in rush to boost defence; Bloomberg, April 23, 2025, US chaos is an opportunity Europe should seize; Financial times, May 5, 2025, Trump has created a chance for the euro to rival the dollar.
17) https://www.esrb.europa.eu/news/pr/date/2025/html/esrb.pr250403~02f9ee518f.en.html
18) https://edition.cnn.com/2025/04/11/business/bond-market-trump-treasury-yield-rates,
https://www.cnbc.com/video/2025/05/08/trump-understands-if-he-loses-the-bond-market-his-whole-agenda-goes-in-the-wastebasket-joe-amato.html