Are US Treasury Bonds Still A Safe-Haven Asset?
Amidst the evolving financial landscape, it's important to closely scrutinize the challenges facing the US Treasury bond market. Recent shifts in US financial policy and credit ratings have transformed what was once the "safe bet" into a riskier investment. Notably, the bond market has endured one of the worst market crashes, amplifying the need to explore alternatives for stability and higher returns.
Cornerstone of the Financial Landscape
US Treasury bonds, long hailed as a cornerstone of the global financial landscape, are now facing scrutiny amid recent challenges. Backed by the full faith and credit of the US government, these bonds have traditionally been considered safe-haven assets. Investors lend to the government and, in return, receive periodic interest payments and the return of the principal amount upon maturity. The perceived advantage lies in their low-risk nature, offering stability during economic uncertainty.
US Credit Outlook Downgraded
However, the once-unquestioned safety of US Treasury bonds is under siege. Moody's recent downgrade of the US credit outlook from "stable" to "negative" signals concerns about a large fiscal deficit and political polarization, raising doubts about the government's ability to reach a consensus on fiscal plans. While Moody's maintains the highest AAA credit rating, Fitch lowered its US debt rating to AA+ in August 2023, expecting fiscal deterioration over the coming years, echoing the volatility of these financial instruments. The downgrade by Fitch is only the second time in US history that the country's debt has been downgraded from a AAA level. Standard & Poor’s had previously downgraded its score to AA+ back in 2011 after an earlier debt-ceiling crisis. Refer to the “US Debt Credit Rating” table for a rating comparison by rating agency.
US Treasury Yields Hit New 16-Year High
Adding to the uncertainty, US Treasury yields spiked to a 16-year high in mid-October 2023. The benchmark 10-year US Treasury yields rose to 4.91%, and 30-year US Treasury yields reached 5.02%. This surge, starting in late July 2023, has introduced liquidity and interest rate risks for existing bonds, impacting their market value when sold prior to maturity. Refer to the “10-Year U.S. Treasury Note” chart for a detailed evolution of the yield since 2007.
Collapse in Treasury Bonds Ranks Among Worst Market Crashes
The consequences of these market dynamics are evident in the bond market sell-off. Bloomberg reported substantial losses on Treasury bonds, with maturities of 10 years or more seeing a 46% decline since March 2020. The 30-year bond, in particular, experienced a staggering 53% plunge. These losses rival those seen in stock markets during some of the worst crashes in recent history, underscoring the severity of the current downturn. See chart “Worst Market Crashes in US History“ for a comparison of market crashes.
Weak Demand for Long-Term US Treasury Bonds
As concerns over debt sustainability and bond prices mount, investor sentiment has shifted. On November 9, 2023, the latest auctions for long-term US Treasury bonds showed weak demand, as reported by the US Treasury Department via its Treasury News publication. Primary dealers had to acquire a significant 24.7% of the $24 billion 30-year bond issuance, well above the typical 11% purchased by banks during investor pullbacks. The bid-to-cover ratio hit its lowest level in nearly two years, and the auction experienced the smallest pool of bidders since 2021. This indication of weak demand raises questions about the ongoing attractiveness of long-term US Treasury bonds in the eyes of investors.
What Does it Mean for Investors?
In the face of uncertainties surrounding US Treasury bonds, investors can turn to first trust deed lending for its distinct advantages over traditional bonds. First trust deeds offer secured note options backed by tangible assets, providing a layer of protection with conservative average loan-to-value ratios of 65%. The competitive rates starting at 10% outpace inflation and present a significantly higher return than the current yields of bonds, which hover around 5%. Notably, first trust deed investments eliminate liquidity risk, offering stability and peace of mind to investors, unlike bonds whose prices can be adversely affected when sold prior to maturity.
Furthermore, the influence of high US Treasury bond yields on mortgage rates positions Safeguard in a unique position to facilitate some of the lowest-risk, highest-yielding loans to date. As highlighted in their October 2023 newsletter, Safeguard's lenders stand to benefit from rising interest rates, capitalizing on favorable market conditions. In a financial landscape where stability, security, and superior returns are paramount, first-trust deed lending emerges as a compelling alternative for investors seeking to diversify their portfolios and navigate evolving market dynamics.
With our team's two decades of experience, we are here to help you make the most of your investment opportunities. Call 877-280-5771 or reply to this email and put your money to work for you!
