MNI BRIEF: US Treasuries Seen Increasingly Risky-JH Paper

U.S. government bonds did not trade as the world's safe haven asset during Covid and in the years since investors have come to see American debt as more risky, with implications for Treasury market functioning and future Federal Reserve QE programs, according to research presented Friday to the Kansas City Fed's annual economic symposium in Jackson Hole,

"During COVID, U.S. Treasurys were not trading as the world’s safe asset of choice, but rather, Treasurys were trading much like the sovereign bonds issued by other mature economies. Towards the end of the sample, AAA corporates are priced as close substitutes for long-dated Treasurys," authors Roberto Gomez-Cram, Howard Kung, and Hanno Lustig wrote in the paper. "Treasury investors seem to have shifted to the risky debt model when pricing Treasurys" and policymakers "should internalize this shift when assessing whether bond markets are functioning properly."

The authors also suggest that central bank bond purchases distort the incentives of governments and impair the price discovery in government bond markets. "It is not inconceivable that governments in some mature economies have overestimated their true fiscal capacity as a result of these large-scale asset purchases," the report said. (See: MNI INTERVIEW: US Budget Deficit Unsustainable - Ex-CBO Chief)