/ world today news/ US government securities are no longer a safe haven during global shocks
The war in the Middle East brought down the value of US government debt. The classic scheme of gathering capital from around the world through war in the Middle East no longer works.
On the day of the Hamas attack on Israel, the value of the US national debt plummeted and continues to fall to this day.
Global hedge funds ended October with a record net short position in U.S. Treasury futures. Regulators have expressed concern about the risks to financial stability that could arise from a sudden and chaotic closure of these interest rates in an adverse bond market scenario,” The Globe and Mail wrote.
A short position on the stock market (short) is a bet that the price of an asset will fall, and a long position (long) is a bet that the price of an asset will rise. Falling bond prices indicate higher yields and vice versa.
Immediately after the outbreak of the conflict in the Middle East, the sale of US government bonds (Treasuries) became a major trend in the stock market.
In October, the Global Funds “increased their net short position in two-year [щатски] futures by 242,000 contracts to 1.6 million contracts and by 193,000 contracts in five-year futures to 1.93 million. Both amounts are new records.”
„The Middle East always flares up when Uncle Sam needs to attract money from the outside world. This machine has always worked perfectly until now. Over the past 80 years, US debt has remained the most reliable haven for preserving capital in the event of crises and shocks.
Whenever the domestic market failed to supply the US Treasury with the liquidity it needed, foreign investors did, panicking amid yet another escalation of the Arab-Israeli conflict.
However, judging by the fact that Israel is already on fire, Iran, Turkey and Saudi Arabia are preparing for war, and US bonds continue to fall in price – the machine of man-made crises as an incentive to buy US Treasures has broken down ” , notes Evgeniy Ogorodnikov, the financial analyst of Expert magazine.
The famous Russian broker Dmitry Golubovsky pays attention to “the unprecedented collapse of the dollar debt market” against the background of the raging conflict in the Middle East and the collapse of the government debt market: “This has never happened in the entire history of the United States. While they have been around since their inception, there has not been such a negative dynamic… It seems that the securities (US Treasuries) are already very cheap, yet they do not want to buy them.
Danish financial analyst Torsten Slok points out that “ten years ago, foreigners owned 33% of the US government debt. Now that amount has shrunk to 23%.”
Professional investors around the world mainly analyze the patterns in the dynamics of the 10-year US government bonds to draw conclusions about the further development of the markets.
The yield on 10-year government bonds began to rise and fall in value starting in 2016 amid the political struggles that began in the United States. But in 2020, when the “pandemic” began, the yield on 10-year government bonds hit a record low of 0.54% as investors panicked and global markets plunged into chaos. World capital rushed to invest in the number one asset – US government debt.
Until recently, US Treasuries were considered the safest investment in the world, and in times of geopolitical turmoil, US Treasures were in high demand by international investors. But now the outbreak of the military conflict in the Middle East has only exacerbated the negative trend of the past two years of the withdrawal of global investors from US government debt.
Moreover, two and a half weeks after the outbreak of the military conflict between Israel and Hamas, Bloomberg wrote: “Global bond markets experienced an unlikely anomaly for the first time in history: emerging market bond yields … fell below the level of US Treasures.
The sell-off in US government debt that began in May has sent borrowing costs for the world’s largest economy soaring to an average yield of 5%… The anomaly emerged in the past few days, when yields on government bonds of [САЩ] it briefly traded above that in emerging markets.”
But is this an anomaly when, over the past five months, the average US Treasury yield has risen by about 140 basis points, while emerging market yields have only risen by 20 basis points?
Guillaume Tresca, Global Emerging Markets Strategist at Generali Investments (Paris) said: “I expect government bond rates of [САЩ] to fall over the medium to long term, which should also lead to local emerging market interest rates falling, but at a slower pace than Treasury rates on [САЩ].“
What reasons do global investors have to ditch US Treasuries?
First of all, there is the negative spread on US Treasuries, which started late last year and reached a local high in October 2023.
In stock markets, the spread is the difference between the price at which a bidder is willing to buy a stock (the ask price or the offer price) and the price at which it will be sold (the bid price). At the same time, the spread is a more general concept of “the difference between any comparables”.
Usually, before a recession occurs, the spread turns negative for a certain period, after which it goes out of the minus 0.26% “red zone” and from then on is considered a reliable leading indicator of a recession. Since the start of 2023, the spread on US Treasures has plunged well beyond the red zone and remains there to this day.
Thus, the objective financial analysis shows that after 3-4 months in the American economy a recession may begin and investing in the US government debt, which has de facto gone out of control, is extremely risky. It cannot go up indefinitely.
In any case, there will be a correction. Either the U.S. national debt will stop growing, or inflation will devalue it. This will hit global finances hard, as US Treasuries are the largest asset class in the world. These bonds are held by a huge number of investors: states, pension funds, banks.
Sooner or later they will all lose their money: eaten either by default/restructuring or inflation.
However, it is not so important when a possible recession will begin in the US economy. Another important thing is that the machine for treating American finances by inciting world conflicts has broken down and, it seems, forever.
Translation: ES
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