The Safe Haven Trade Has More Than One Candidate for the First Time

The safe haven trade now has more than one credible destination, with U.S. debt held by the public near 99% of GDP and the federal deficit close to 6% of GDP before any recession has begun. Long dated U.S. Treasuries absorbed the crisis bid almost alone through the tech wreck, the Global Financial Crisis and the pandemic, when the 10 year yield fell by between 130 and 366 basis points each time. Federal debt has since topped $40 trillion, and larger Treasury buybacks failed to hold the long end down while the U.S. dollar stayed weak. Capital has moved into precious metals over the same stretch, placing gold alongside Treasuries and the dollar as a claim on the same crisis flow.

David Scutt is a Senior Market Analyst for Global Macro at StoneX Media, based in Australia, and spent more than a decade as an FX spot, forwards and money markets dealer in bank treasury, where he managed interest rate and liquidity risk. He covers foreign exchange, commodities and equity indices as one connected complex rather than as separate markets, which is the vantage point a question about competing safe havens requires.

Key Themes

• The 10 year U.S. Treasury yield fell 130 to 366 basis points in every crisis since 2000.
• U.S. debt held by the public sits near 99% of GDP, against 35% before the Global Financial Crisis.
• Larger Treasury buybacks failed to hold long end yields down, and the U.S. dollar stayed weak in the same week.

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Treasury Buybacks Failed to Hold the Long End Down

The U.S. Treasury announced larger buybacks of long dated bonds and long end yields still finished higher, which separates the mechanics of Treasury demand from the mechanics of dollar demand. Yields initially fell on the announcement, but, as Scutt describes it, "the long end has since backed up again while the dollar has remained weak". That combination matters because a weakening dollar alongside rising long dated Treasury yields is the opposite of the pattern the safe haven trade has produced in past episodes, when both moved together toward safety. Consequently, investors reading the two as a single position now have evidence that they can separate, and that the long end can absorb supply pressure even when demand for dollar liquidity is intact.

Precious Metals Absorb Flows the Long End Once Captured

"That may also explain why we've seen capital flow into other perceived stores of value recently, particularly precious metals, and even in some quarters, crypto", Scutt says of the fiscal position the U.S. now carries into any downturn. Precious metals competing for the crisis bid gives that flow a destination outside the Treasury market itself. The historical record still favors long dated Treasuries, and revenues weakening while spending rises has never yet overwhelmed the scramble for safety at the long end. According to Scutt, "I suspect long dated Treasuries would rally in the next serious crisis", which frames the metals bid as a hedge against an untested outcome rather than a verdict already delivered.

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--- Written by Gus Farrow, Senior Manager, StoneX Media

--- Expert: David Scutt, Senior Market Analyst, Global Macro, StoneX Media