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Good morning. Typically, a global war and stock market sell-off would prompt investors to seek the safety of Treasuries. But that hasn’t happened this time. After February 27, the day before the US launched attacks on Iran, not only did the S&P 500 fall almost 8 per cent at its trough, 10-year Treasuries fell, too. Yields approached 4.5 per cent, indicating investors were nervous about holding what is normally considered a haven asset.
And even as anticipation of an end to the war has sent stocks rallying to a new record high, the 10-year Treasury yields have only unwound around half of their increase (bond prices and yields move in opposite directions).
In part this reflects inflationary concerns, as oil futures prices remain elevated, leading investors to adjust their policy rate expectations higher. Jim Reid at Deutsche Bank also notes that the war could lead to more fiscal spending. “Both to protect consumers and on a structural basis [the war] will drive pressures for more spending on defence and energy independence. So another thing to weigh on bonds versus equities,” writes Reid.
Another factor could be the decline in the convenience yield for Treasuries (which Unhedged also wrote about here). The convenience yield is the reduced interest rate paid on Treasuries compared to securities of comparable safety, duration and credit quality, thanks to their liquidity, reliability and usefulness as collateral. Viral Acharya and Toomas Laarits of NYU Stern have found that the convenience yield for long-dated Treasuries significantly declined last spring with the tariff war chaos. This has led to long-term Treasuries acting more like stocks, eroding the hedging properties that have made them so useful to investors. What are the implications for portfolios, and the US government, if Treasuries lose their special status? Send us your thoughts: [email protected].
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