Not All U.S. Treasuries Are ‘Truly Safe’

U.S. Treasuries are seen globally as the world’s favored haven asset. Yet it’s short maturities that best fit that definition, according to a Federal Reserve Bank of Dallas paper.

“Not all Treasury securities are equally safe,” according to the paper published Tuesday by economist J. Scott Davis. “Long-term Treasury bonds may have no default risk, but they have liquidity risk and interest rate risk—when selling the bond prior to maturity, the sales price is sometimes uncertain, especially in times of financial market stress.

“Short-term U.S. safe assets are the assets that are truly safe, and safe-haven flows lead to an increase in these short-term inflows, even while long-term inflows fall,” Davis concludes.

These risks were underscored in March amid the U.S. regional banking crisis, when losses on long-term Treasuries and other government-related debt became key forces that brought down several regional banks. There was, of course, a run on deposits, yet clients’ realization that banks were sitting on large unrealized losses on long-term government debt helped spark the tumult.

The U.S. has a large external debt, particularly in safe assets, Davis writes. In times of crisis, investors view U.S. debt—especially short-term Treasuries—as a safe harbor. “In a crisis, when investors prize safety and liquidity, they flock to safe short-term T-bills,” Davis writes. He lays out how, in two recent major financial crises, from 2007 to 2009 and during the onset of the pandemic in 2020, “long-term U.S. portfolio debt inflows fell but short-term portfolio debt inflows increased.”

Supporting U.S. assets overall during these turbulent periods is the fact that the dollar is the world’s reserve currency, tending to appreciate during crises, the economist writes.

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