A perfect storm of economic shocks — from tariffs and sticky inflation to spiraling debt and policy uncertainty — has investors asking a once-unthinkable question: Are U.S. Treasuries still a safe haven?
The panic first flared in April, when investors dumped both stocks and bonds following President Trump’s “Liberation Day” tariffs, triggering a rare fire sale in Treasuries and throwing the traditional flight-to-safety playbook out the window.
That’s not how this is supposed to work, according to textbooks. When things go bad, capital tends to rotate out of risk assets and into Treasuries. What happened instead was an all-out selloff on both sides.
“I’ve been warning that Treasuries are now considered a risk asset,” longtime market bear Peter Schiff posted on X. “When the threat is inflation and a weak dollar, there’s no safety in Treasuries.”
The @CNBCFastMoney crew was wondering why Treasuries aren't getting a safe haven bid. If they still had me as a guest they'd know. I've been warning that Treasuries are now considered a risk asset. When the threat is inflation and a weak dollar, there's no safety in Treasuries.
undefined Peter Schiff (@PeterSchiff) June 3, 2025
Now with 20- and 30-year Treasury yields hovering above 5% despite, the message from global investors is clear: confidence in America’s creditworthiness is eroding.
Adding to the anxiety, Moody’s downgraded the U.S. credit outlook in May, citing Congress’ failure to rein in “large annual fiscal deficits and growing interest costs.” As of June 3, federal debt sits at $36.22 trillion, up a staggering $10 trillion from just five years ago.
Trump’s fix? Rather than taming federal spending, he’s pushing to overhaul a post-crisis banking rule that many say is choking the Treasury market.
The rule at the center of it all
The rule in question is the supplementary leverage ratio (SLR), a regulatory capital rule born out of the 2008 financial crisis under Basel III. It requires that large U.S. banks maintain 5% capital against all assets regardless of risk.
That includes U.S. Treasuries.
Wall Street has long argued that the rule discourages banks from holding Treasuries and makes it harder for them to serve as intermediaries in the bond market. As Bloomberg reported this week, there’s now bipartisan momentum to change that.
U.S. Treasury Secretary Scott Bessent told Bloomberg he expects to see movement “over the summer” as the rule winds its way through the Federal Reserve, FDIC, and Office of the Comptroller of the Currency (OCC).
He called the SLR “a surcharge,” arguing that “banks are being penalized for holding Treasuries,” even though they’re widely regarded as risk-free assets.
There’s a lot riding on whether banks get regulatory relief.
As Nellie Liang — a Brookings senior fellow and former Under Secretary of the Treasury for Domestic Finance — points out, the U.S. Treasury market isn’t just big. It’s foundational.
“There is no larger thoroughfare for global capital than the market for U.S. Treasury debt securities,” she wrote.
Daily Treasury market volume averages $900 billion and can exceed $1.5 trillion. Treasury repo markets clear $4 trillion per day. Add in Treasury futures and the daily turnover rises even higher.
Disruptions in that flow, whether due to rising yields or lack of buyers, don’t just impact Washington but also ripple across the entire global financial system.
Bruce Richards, CEO of Marathon Asset Management, warned that roughly $10 trillion in Treasuries will need to be rolled over or refinanced on top of any new debt issued to cover widening deficits.
“When you have a tariff policy that leads to a weaker dollar and maybe some indigestion by foreigners in owning our Treasuries — and they own 30% of Treasuries — it becomes that much more alarming,” Richards said.
While there’s still plenty of demand for short-term bonds, appetite for long-dated debt has dried up.
“You have macro funds, hedge funds, shorting the long end,” he said, “knowing that the Fed’s not buying Treasuries and that foreigners will be reluctant to buy the long end, and yet you have so many Treasuries for sale.”
The math makes it worse. 30-year Treasuries carry a duration of 18 years, meaning every 1% rise in rates wipes out roughly 18% in value.
Would changing the rule even help bring yields down?
Supporters of SLR reform argue that loosening capital requirements would let banks buy more Treasuries, boosting demand, improving liquidity, and helping push yields down.
“Relaxing the SLR is a game-changer for banks,” wrote James E. Thorne, chief market strategist at Wellington-Altus, in a post on X. “Yes, a secular bull run in banks is right in front of us, yet few are paying attention.”
Relaxing the SLR is a game-changer for banks, unleashing capital for lending and trading, boosting profits, and fuelling Treasury market liquidity. Yes, a secular bull run in banks is right in front of us, yet few are paying attention.
undefined James E. Thorne (@DrJStrategy) May 24, 2025
The last time the SLR was tweaked — during the height of the COVID panic in 2020 — the Fed temporarily exempted Treasuries and reserves from the ratio calculation to ease bond market stress. That move helped bring yields down and stabilized liquidity.
Bessent believes the change could have a similar effect today.
“I’ve seen estimates that it could bring yields down by tens of basis points,” he told Bloomberg. “Certainly during the COVID crisis, it was temporarily taken off and it had a big effect.”
On the flip side, critics like Jeremy Kress, a business law professor at the University of Michigan and former Fed regulator,say banks might pocket the gains.
“If we lower the leverage ratio, why would banks buy more Treasuries instead of just distributing more capital?” Kress asked on X. “Absent strong protections in the rule, cutting the SLR would be a giveaway to big bank shareholders and executives.”
However, the political calculus may be shifting. With Treasury yields hovering at levels that threaten to derail both housing and business, policymakers are scrambling to do something.
If Bessent and regulators move forward this summer, it could mark the Trump administration’s most decisive step yet to restore confidence in the Treasury market. Whether it works remains to be seen.
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