U.S. Treasurys, or government bonds, have a significant influence on all currency and tradeable markets. Any risk measurement in finance is relative. If one insures a home, the maximum liability is in some type of money.
Similar to the above, if a bank takes a loan, the creditor must calculate the likelihood of the money being not returned and the risk that the amount will be devalued due to inflation.
Let’s consider what the consequences would be for debt issuing if the U.S. government suspended payments to certain countries or regions. Current estimates put the value of foreign bonds at $7.6 trillion. Multiple banks and governments rely on this cash flow.
A potential cascading effect by countries and financial institutions could immediately affect their ability to settle imports or exports. This would cause further chaos in the lending market because everyone would rush to reduce their risk exposure.
The U.S. Treasurys are worth more than $24 trillion. Participants generally believe that the government-backed debt is the best option.
The Treasury yield is nominal. Keep in mind the inflation
Professional investors do not trade the yield widely reported by media. Each bond is unique and each has its own price. The contract maturity allows traders to calculate the annualized yield. This makes it easier for the public to grasp the benefits of bonds. The equivalent yield of 4% until the contract matures is available by purchasing the U.S. 10-year Treasury at 90.
Investors who believe that inflation is not going to be contained soon will tend to ask for a higher yield in trading their 10-year bonds. If other governments are at risk of being insolvent or hyperinflating currencies, investors may seek refuge in U.S. Treasurys.
The delicate balance allows U.S. government bonds trade lower than other assets and even run below expected inflation. Negative yields were unimaginable a few years back, but they became common after central banks reduced interest rates to zero in order to boost their economies in 2020-2021.
Investors pay for the security and protection of government-backed bonds rather than the risk of bank deposits. It is not as crazy as it sounds, but there are still over $2.5 trillion in negative-yield bonds. This does not take into account the inflation impact.
Inflation is more expensive for regular bonds
The yield of the three-year U.S. government bonds is 4.38%. This shows how disconnected the bond is from reality. Investors are either assuming that the Federal Reserve will ease consumer inflation or willing to sacrifice purchasing power for the lowest-risk asset on the planet.
The United States has never defaulted in modern history. The debt ceiling, in simple terms, is a limit that the government has set. The debt ceiling is a limit that Congress sets for the federal government.
An HSBC Holdings bond due to mature in August 2025 has a 5.90% yield. The U.S. Treasury yields should not be interpreted as an indicator of inflation expectations. It is also less significant that it has reached its highest level since 2008, as data indicates that investors are willing sacrifice earnings to secure the lowest-risk asset.
The U.S. Treasury yields can be used to compare other countries and corporate bonds, but not necessarily in absolute terms. These government bonds will reflect inflation expectations, but could be severely limited if there is an increase in generalized risk for other issuers.
These views and opinions are the author’s and do not necessarily reflect those of Cointelegraph.com. You should do your research before making any investment or trading decision.