In May this year, poor demand for the auction of 20-year US Treasury bills drove the greenback down and triggered a stock market selloff. US government bonds were effectively being treated as a proxy for wider investor concerns about the US economy, budget deficit, and the Trump administration’s policies.
The auction showed that appetite for Treasuries could trigger wider volatility and pullback across other asset classes and the broader economy.
Concerns over political pressure on US financial agencies that have been relied on for objective, impartial market feedback are becoming justified. Look at the administration’s dismissal of the head of the Bureau of Labour Statistics in August after the publication of job figures which President Donald Trump said made him look bad. There’s no reason to think that such pressure will stop there.
Low standards and manipulation by major US credit ratings agencies helped trigger the 2008 global financial crisis. The impact of political pressure on US financial regulators could easily be as influential – and disastrous.
For now, at least, the US dollar remains the world’s default investment currency, and the US still leads the world’s financial markets. But it’s not hard to envisage a time when that may change.
According to the International Capital Market Association, the US accounted for US$22.4 trillion of the global sovereign, supranational and agency bond market in 2020. China was second with $19.8 trillion, and Japan third with $12.4 trillion. Together, the three countries had shared close to two thirds of the global market. Meanwhile, the global corporate bond markets are dominated by the US and China with $10.9 trillion and $7.4 trillion, respectively, representing 45% of global share.
That breakdown could look very different in 20 or 40 years. With more and more markets maturing and offering attractive and reliable fixed income opportunities, and additional risk mitigation and income generation options offered by currency arbitrage, there may no longer be much incentive to invest in US bonds.
In turbulent times, safe harbours should strive to stay safe.
