Gold dip looks like a buy as central banks step in, Barclays tells investors
Over the five trading sessions during the week of April 7, intermediate to longer-term Treasury yields were sharply higher in one of the largest moves higher in yields since 2020. Moreover, U.S. Treasury markets have sharply underperformed other developed government bond markets recently, calling into question the relative attractiveness of U.S. Treasury securities. However, despite recent volatility, U.S. Treasuries remain the world’s preeminent safe-haven asset (for now), in our view, underpinned by the dollar’s global reserve status (for now) and the market’s depth and liquidity.
This month’s Treasury market sell-off, while severe, does not signal a "regime shift" away from this status, as some have suggested. Instead, we believe it mostly reflects temporary deleveraging pressures rather than a fundamental rejection of Treasuries’ safety, although there is no doubt foreign selling out of U.S. dollar assets has occurred and added to market volatility. Throw in concerns about Federal Reserve independence and potentially an unforced policy error by cutting rates too soon, and it makes sense longer maturity Treasury yields have continued to move higher. But if the U.S. economy does contract (and especially if it takes other economies with it), we think the U.S. bond market will remain the haven destination due to its size and liquidity.
U.S. Treasuries Have Significantly Underperformed Global (ex U.S.) Government Bond Markets Recently
Source: LPL Research, Bloomberg 4/21/25
And the idea of the United States losing its "exceptionalism” — particularly in relation to U.S. Treasuries as a global safe-haven asset — has been discussed in various forms for decades — since the era of bell-bottom pants and Atari game consoles. Each past episode questioned Treasuries’ haven-status, yet their status persisted due to unmatched market depth, dollar centrality, and geopolitical clout. But perhaps the biggest rebuttal against Treasury securities losing their haven status is, frankly, that there are no better alternatives (for now?). There are no guarantees that that status can’t change, but we would argue that is something that would take place over decades and not days. Here are a few options that may be considered though:
Alternatives and Their Limitations
- German Bunds. While highly rated, the German bond market is significantly smaller (approximately €2.4 trillion total) and less liquid. China’s $760 billion of U.S. Treasuries, for example, only represents approximately 3% of Treasury debt outstanding, whereas a similar amount invested in Bunds would represent approximately 28% of Bunds outstanding.
- Japanese Government Bonds (JGBs). JGBs suffer from low but increasing yields and Japan’s high debt-to-GDP ratio, raising long-term solvency concerns. Their market is also less accessible to foreign investors.
- Chinese Government Bonds. Despite China’s economic size, its bond market lacks transparency, faces currency convertibility restrictions, and carries geopolitical risks, making it an unsuitable haven.
- Gold. While a traditional safe-haven, gold lacks income generation and faces storage and transaction costs, limiting its scalability for institutional investors. However, the move into gold recently likely, at least partly, reflects central banks diversifying their reserve assets.
- Cryptocurrencies. Digital assets like Bitcoin are highly volatile and lack the stability or institutional acceptance needed to rival Treasuries. Once markets develop more depth, these types of securities could also be used to diversify away from Treasuries — just not yet, though, in our view.
Why This Time Could Be Different Though
That said, there is a specific risk to Treasury markets with respect to foreign demand for U.S. Treasuries. If the stated goal by the Trump administration is to truly reduce or eliminate trade deficits (remember one country’s trade deficit is another country’s trade surplus), that would likely mean a big loss of demand from foreign buyers. Foreign investors own roughly $8.5 trillion of the $26 trillion in marketable Treasury debt outstanding, with roughly half of that due to trade surpluses.
Most countries use the dollar inflows from trade surpluses to invest in U.S. Treasuries (along with other U.S. assets). No trade surplus means no excess dollars, which means less demand for Treasuries. While we don’t think foreign investors are boycotting Treasuries currently, it does represent a big risk to the Treasury market, especially if a viable alternative can be found. However, further supporting the argument that foreign buyers haven’t yet boycotted Treasury markets altogether was the phenomenal demand — from both domestic and foreign investors — for the recent 10-year and 30-year U.S. Treasury auctions and the lackluster demand for the recent 5-year German Bund and Japanese Government Bond auctions.
This was further confirmed with the recent Treasury International Capital (TIC) data that showed foreign investment in U.S. bonds picked up in February (the latest data available). This week’s $183 billion (total) in Treasury auctions will be important to watch for continued foreign demand. So far anyway, investors continue to prefer U.S. Treasury securities.
Non-Domestic/Foreign Investors Are an Important Buyer of Treasuries
Source: LPL Research, Bloomberg Intelligence 4/21/25
***
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.