Why US bonds are not risk-free

Practically every financial meltdown or crisis can be traced back to a misunderstanding of which assets are "risk-free".

- Allison Schrager

Investors think they have a risk-free asset — it could be a mortgage-backed security, shares in a Bernie Madoff fund, Greek debt — and are surprised when it turns out not to be.

For the past several years, the term has been used a lot to describe one of the most widely traded securities in the world: US Treasuries. The markets for 10- and 30-year government bonds experienced more volatility in April in response to uncertainty around tariffs and the future of the world financial order.

Rising yields and falling prices amid market turmoil suggest markets no longer see Treasuries as a "safe haven" (another favourite two-word description). Treasuries, which have long held a special place in the global financial system because of their ubiquity and liquidity, may be less special in the future.

All of this means that US bonds may be losing some of their status as a risk-free asset. But make no mistake: Treasuries were never risk-free, aren't now and won't be anytime soon.

The proximate cause of last week's volatility is the possibility of a trade war: Treasury prices rightly fell in response to the prospect of less trade. President Donald Trump has articulated a desire to shrink the current account deficit, which by definition means foreigners will have less need or desire to buy bonds.