Oct 5, 2026 · 59 min
Treasuries lose their safe-haven status
Why Treasuries Became Risky Again
Rising yields and weaker stock-bond diversification could reshape how investors assess US debt, monetary policy, and American financial power.
- 1Pandemic-era Fed communication flattened markets’ perceived policy reaction function as inflation accelerated.
- 2Treasuries increasingly demand compensation for inflation, real-rate, and recession risks rather than reliably hedging equities.
- 3Changing debt buyers, persistent deficits, and deep bond markets connect Treasury pricing to US geopolitical influence.
Don't miss
Carolin Pflueger connects Treasury safety to the credibility of monetary policy and the broader geopolitical power of deep bond markets.
The brief
Long-term Treasury yields have risen as bonds lose their traditional role as stock-market hedges, raising questions about inflation, deficits, and US financial power.
Economist Carolin Pflueger explains how markets infer the Fed’s policy reaction function—and how unusually clear pandemic-era guidance shaped those expectations.
The central tension is whether higher yields reflect greater Treasury supply or greater compensation for inflation, real-rate, and recession risks.
Pflueger argues that bonds may regain their hedging role through luck or better monetary policy, but stable inflation expectations have not prevented rising volatility.
The conversation links deep Treasury markets to war financing, national credit, and financial hegemony, asking whether market leadership can shift independently of military power.
The episode’s sharpest insight is that safe-haven status is not intrinsic: it depends on policy credibility, investor expectations, and the structure of economic shocks.
What was said on this episode
26 statements · 9 positive · 12 negative · 2 mixed · 3 neutral
A well-understood Fed reaction function improves and accelerates monetary-policy transmission.
“if the policy reaction function is well understood, then that means that as data comes out, unemployment, inflation, and so on, the policy rates will move in the direction that the Fed intended and thereby help with monetary policy transmission or maybe even speed it up before the next FOMC meeting.”
Listen at 7:06
Clear Fed forward guidance eliminated dispersion in Fed-funds forecasts after late 2011.
“after late 2011 was when the Fed came out and gave very clear date-based forward guidance. Interest rates will be at zero at least until mid-2013. At that point, all the Fed funds rate forecasts collapsed to zero and you know, you see absolutely no dispersion.”
Listen at 13:07
In 2021, markets perceived the Fed policy rate would remain zero regardless of conditions.
“the perceived reaction function that we saw at that time was extremely flat. So there was a perception that the policy rate would stay at zero pretty much irrespective of economic conditions.”
Listen at 15:12
Fed actions increased the market’s perceived inflation response from zero to one by late 2023.
“after the Fed started to act, that's when in our data we see that the perceived inflation response really picks up. It basically goes from 0 to 1 between say early 2022 towards the end of 2023.”
Listen at 16:48
Perceived policy responses to output are steeper during tightening cycles.
“it tends to be steeper during tightening cycles.”
Listen at 21:46
Perceived policy reactions become flatter during easing periods.
“easings are often sudden and then not much else is expected. So that tends to be a time when the perceived policy reaction becomes flatter.”
Listen at 22:04
Treasury bonds were viewed as risky during parts of the 1970s through 1990s.
“treasury bonds were not always safe historically. So there were periods, especially during the '70s, '80s, and '90s when treasury bonds were viewed as quite risky.”
Listen at 23:31
Treasury bonds became negatively correlated with stocks after 2000, but bond risks recently increased.
“Now post-2000, treasury bonds were safe. In the sense that they had a negative correlation with the stock market. And then in the most recent period, these types of bond risks have gone up again.”
Listen at 24:11
Positive bond-stock correlation removes diversification protection for portfolios holding both.
“having a positive correlation means that there is nowhere to hide.”
Listen at 24:35
Recent bond risks resemble the 1980s because bonds and stocks have moved together.
“the increase in bond risks has some similarities and some differences compared to the 1980s. The similarity is that bonds and stocks have moved together.”
Listen at 26:24
A return to 1980s-style risky bond markets requires a rare combination of conditions.
“it really requires a perfect storm to go back to the 1980s risky bond markets.”
Listen at 28:13
1980s-style bond risk requires inflationary or supply shocks and weakened fiscal credibility.
“It requires the inflationary shocks, let's say supply shocks. The typical one would be oil price shocks, or it could also be fiscal sort of lack of credibility, inflation expectations that start moving.”
Listen at 28:20
A gradual monetary-policy rule may enable a soft landing after supply shocks.
“a more gradual rule may be able to stick a soft landing.”
Listen at 29:23
Treasury bonds have become substantially riskier over the past five years.
“what has changed I think is that treasury bonds have become a lot riskier.”
Listen at 30:18
Greater asset risk lowers willingness to pay and raises required returns.
“if an asset is risky, investors should not be willing to pay as much for it. Or said differently, investors should require a higher return to compensate for holding this risk.”
Listen at 30:34
Higher Treasury risks should raise yields and lower bond prices.
“because these risks have so gone up so much, that should really drive up the yield or drive down the price on bonds because they, they move inversely.”
Listen at 30:47
Improved Treasury hedging explained roughly one-quarter of the 10-year yield decline.
“roughly maybe a quarter of the decline between the mid-'80s and 2010s in the 10-year yield was due to Treasury bonds becoming better hedges.”
Listen at 33:22
Most of the 2020–2025 10-year yield increase reflected bonds becoming more stock-like.
“over the past 5 years, or let's call it 2020 through 2025, the increase in the 10-year yield was really the majority was you can explain with changes in bonds becoming more stock-like.”
Listen at 33:38
Pricing in gradual monetary policy helps Treasury bonds retain hedging characteristics.
“having a more gradual approach to monetary policy priced in helps in keeping the bonds bond-like.”
Listen at 38:02
Central-bank credibility can help keep bonds acting as hedges.
“If the trust is there that eventually the central bank will do what is needed, then that's something that would, you know, in my models is something that can keep the bonds bond-like.”
Listen at 38:19
Long-term inflation expectations stayed stable while inflation uncertainty increased.
“even though on average, I think the inflation the average long-term inflation that's priced in looks very stable. You know, we have seen changes that are probably related to more uncertainty.”
Listen at 40:31
Changes in Treasury safety substantially explain changing bond yields.
“the change in the safety of treasuries themselves is a substantial component.”
Listen at 42:31
Perceived financial safety can lower financing costs and reinforce a country’s advantage.
“if financial markets expect that one country is safer, they offer lower financing rates and that allows for this investment to happen and which makes the expectations justified.”
Listen at 47:31
Including financial conditions barely changed estimated macroeconomic policy responses.
“we found that kind of in terms of the response to the macro economy, that it didn't really change that all that much.”
Listen at 50:25
Treasury bond risks are primarily priced relative to stock-market co-movement.
“there is actually something about the co-movement with the stock market, which would suggest that these bond risks are at least to a first order priced against the stock market.”
Listen at 51:52
Ricardian equivalence is a useful framework for tracing fiscal money flows.
“that's in economics, that's called Ricardian equivalence. And I think it's just a powerful argument, right? You always need to think about where does the money come from? Where does it go?”
Listen at 53:09
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