How the tariff war shock affected the ‘safe asset’ privilege of US Treasuries

US Treasury securities serve as the global safe asset due to their extreme safety and liquidity. However, the tariff shock in April 2025 led to a sharp downturn in US equity markets and a spike in long-term yields. This column argues that a substantial part of this increase in yields reflected a decline in the ‘convenience yield’, stemming from the ‘safe asset’ status of Treasuries. It finds a small role for heightened inflation expectations, and more evidence of a lack of inflows from international investors and a rotation towards gold.

US Treasuries play a unique role in the global financial system. As Landau (2025) expounds in a recent VoxEU column, Treasury securities serve as the global safe asset on account of their extreme safety and liquidity. Such special status of Treasuries is reflected in elevated prices that these securities command, lowering borrowing costs for the US government. Indeed, in influential work, Krishnamurthy and Vissing-Jorgensen (2012) use the AAA-Treasury spread to estimate the reduction of yields owing to the special role of Treasuries, finding a spread of over 70 basis points over nearly a century of data. This arrangement is not, however, without critics. Economists affiliated with the Trump administration have argued that the foreign demand for Treasuries keeps the US dollar overvalued, leading to persistent trade deficits that disadvantage US tradeable sectors (e.g. Miran 2024). In this opposing view, the privilege of issuing the world’s safe asset brings along a host of downstream economic problems.

These two contrasting viewpoints came into sharp focus with the onset of the tariff war spurred by the sweeping tariffs announcement on 2 April 2025. Upon announcement, equity markets plummeted – the S&P 500 lost over 11% in just six trading days – and long-term Treasury yields spiked dramatically, with 30-year rates reaching 5.2% by late May. In ongoing work (Acharya and Laarits 2025) we document that a substantial amount of that spike in long-term yields represented decreases in the convenience yield, suggesting concerns about the long-term safe-asset status of US Treasuries. Our prior work in Acharya and Laarits (forthcoming) provides a theoretical rationale for this finding by linking the convenience yields with the tendency of Treasuries to appreciate in poor economic conditions: the ‘hedging’ or ‘good friend’ property of Treasuries. Our evidence suggests that the long-term hedging property of Treasuries came to be questioned during the onset of the tariff war. What aspect of the tariff shock drove this response? We document a small role for heightened inflation expectations but also find evidence consistent with a lack of inflows from international investors, and a rotation towards gold.

The key object of our analysis is the Treasury convenience yield – the reduction in yields owing to the valuable ‘service flows’ that Treasuries provide: liquidity, safety, and use as collateral. ¹ We measure these convenience yields by comparing regular Treasury bonds with a synthetic alternative constructed from Treasury Inflation-Protected Securities (TIPS) and inflation swaps. This approach, following Fleckenstein et al. (2014), reveals how much extra investors are willing to pay for the special features of Treasuries.

Historically, this measure of the convenience yield has averaged about 24 basis points at the ten-year maturity. What is more, our prior work has established that convenience yields tend to be highest when Treasuries provide good hedges against equity market downturns (Acharya and Laarits, forthcoming). During the tariff war, however, this pattern broke down. The ten-year convenience yield dropped by nearly ten basis points from late March to its 10 April trough. Additionally, the short- and long-term convenience yields diverged in unprecedented ways. Normally, the two-year and ten-year convenience yields move closely together, averaging within two basis points of each other. But in April 2025, the two-year premium ran seven basis points higher than the ten-year – suggesting investors lost confidence specifically in the long-term safety properties of Treasuries while still valuing their near-term benefits. We illustrate these results in Figure 1.

Figure 1 Time series of short-term and long-term US Treasury convenience yields

To study the hedging properties of US Treasuries during the tariff war, we use high-frequency data on exchange-traded funds tracking stocks (SPY) and 7–10-year Treasury bonds (IEF), calculating stock-bond covariance using five-minute intervals. In previous crises – the 2008 financial crisis, the 2020 COVID outbreak – bonds reliably showed strong negative correlations with stocks during turbulent days. The tariff war period violated this historical pattern in striking ways. While bonds initially provided their traditional hedge on 3-4 April and 7-8 April, the relationship reversed sharply on 9 April, 11 April, and 23 April – all days featuring major tariff-related announcements – when bonds and stocks moved together, both declining or rallying in tandem. On 23 April, the stock-bond covariance reached levels seen in fewer than 0.25% of trading days in our sample extending back to 2005.

Our prior work establishes that the convenience yield component of Treasury yields itself is responsible for a sizeable portion of the hedge implicit in aggregate yields. This pattern, too, was reversed in April 2025. In Figure 2, we document that the level of the convenience yield has a strong negative relationship with the stock-convenience yield co-movement, depicted on the horizontal axis. Using the historical relationship, we estimate that this shift in the hedging property of long bonds can account for approximately a 12-basis point drop in convenience yields in April 2025, a significant erosion in the implicit subsidy US taxpayers receive from issuing safe assets.

Figure 2 Relationship between convenience yield and stock-convenience yield co-movement

We analyse a variety of channels that could have given rise to this shift in the behaviour of long-term Treasuries. The first explanation we consider is the role of inflation expectations. Cieslak et al. (2023) document that, in recent data, high expected inflation has tended to coincide with low convenience yields. It would appear, then, that heightened inflation expectations on the part of tariffs could drive the response. However, quantitatively we find just a small increase in expected inflation, particularly at longer maturities, and a drop in inflation breakeven rates.

Instead, international investor behaviour provides an alternative channel. Data from the Treasury International Capital (TIC) System reveal that April 2025 saw $47 billion in outflows from long-term Treasuries, representing a substantial deviation from the typical average $47 billion monthly inflows in the period starting in 2023 when the most accurate methodology has been in place. Regions that normally provided flight-to-safety demand such as the euro area, Canada, and Asian countries were notably absent or selling. We demonstrate the change in long-term Treasury positions across countries and regions in Panel A of Figure 3.

A flight to gold as an alternative safe-haven asset also finds support in the data. Gold has recently attracted a lot of attention in business media, with a price surge of more than 30% from April to October 2025. Using intraday data, we find that the days when Treasuries show positive co-movement with stocks, meaning acting as a risk asset, are precisely the days when gold shows negative co-movements with stocks. This shifting of negative co-movement suggests a tug-of-war for flight-to-safety flows, with gold attracting flows that would historically have gone to Treasuries. We plot this relationship in Panel B of Figure 3.

Figure 3 Change in long-term Treasury positions across countries and flight to gold

As of January 2026, many of the tariffs introduced in April 2025 are in effect and considerable uncertainty regarding international trade remains. Stock markets have recovered to new highs and Treasury yields have fallen at all maturities. The evidence from convenience yields, however, highlights a potentially persistent effect: long-term convenience yields are still depressed relative to short-term counterparts, suggesting that the long-term service benefits from Treasuries are not seen by investors to be as reliable as before.

This shift in Treasury pricing carries significant policy implications. An increase in yields has a direct cost to the taxpayer in the form of higher interest expense, already a substantial portion of the federal budget. The shift in convenience yields to short-term maturities might also tempt the Treasury to concentrate issuance in shorter maturities, potentially creating rollover risk – the need to frequently refinance large quantities of debt in potentially turbulent markets.

On the other side of the ledger, the Treasury Department reports that September 2025 tariff revenue amounted to $31.7 billion, compared to just over $8 billion a year ago. Such increased revenue can cover some of the foregone interest savings from higher convenience yields. However, the overall economic impact depends critically on the economic incidence of tariffs, both in the short- and long-term, and on the financial repercussions, especially of the safe asset property of US Treasuries.

Source : VOXeu