Is Gold the Only Safe Haven Left? US Dollar: About to Surge or Spiral?
Behind the bond chaos lies a deeper tension — between fiscal excess, inflation, and a fragile belief that the US dollar will go strong or not. Is gold the answer, or just another illusion?
Last month’s U.S. Treasury sell-off sent shockwaves through global finance, overturning conventional market wisdom and leaving seasoned investors questioning foundational portfolio strategies. As yields spiked violently upward, the supposedly unshakeable bedrock of the financial system trembled, wiping out months of painstaking gains in just five trading sessions, reminding bond investors of the old market adage: “earnings accrue slowly, losses come quickly.”
What spooked the world’s deepest and most liquid market? And what does it tell us about the future of global finance?
April’s Treasury rout wasn’t just another market hiccup. It was a warning shot that demands our attention.
Anatomy of a Meltdown: The Triple Whammy
The second week of April delivered what traders call the “triple whammy” — a synchronized collapse across asset classes that rarely materializes outside emerging market crises:
The S&P 500 plunged over 9% before partially recovering
Long bonds experienced their worst week since the early 1980s
The dollar index swung wildly, dropping approximately 3%
For context, the 10-year Treasury yield surged 56 basis points to 4.53% — the largest weekly jump over a decade. The 30-year yield shot up 44 basis points to 4.97%, representing the steepest weekly climb since 1982.
These aren’t just statistics; they’re financial earthquakes. The volatility was reminiscent of March 2020’s COVID panic, but with a crucial difference: back then, Treasuries functioned as intended, providing shelter during the storm. This time, the shelter itself caught fire.
Understanding Bond Market Fundamentals
For those less familiar with bond markets, let’s establish some basics. The relationship between bond prices and yields operates inversely:
When bond prices rise, yields fall, and investors profit
When bond prices fall, yields rise, and investors lose money
This counterintuitive relationship exists because bonds have fixed par values at maturity. When analyzing market movements, commentators sometimes reference “yield-to-maturity” and other times “bond prices” — remember, these move in opposite directions.
The Basis Trade Unraveled
To understand what happened, we need to explore the mechanics of basis trades — a seemingly low-risk strategy that can catastrophically unwind during market turbulence.
A basis trade involves simultaneously:
Purchasing Treasury bonds (equivalent to shorting Treasury yields)
Using these bonds as collateral to secure financing
Shorting Treasury futures (equivalent to going long futures yields)
The trade profits from the difference between spot Treasury yields and futures yields, known as the “basis.”
Due to carrying costs, futures yields are typically lower than spot yields (meaning futures prices are higher than spot prices). At delivery, these prices converge, making basis trades theoretically risk-free when held to convergence.
However, the basis is typically small, requiring substantial leverage — usually 50x or higher — to generate meaningful returns. This extreme leverage makes basis trades extraordinarily vulnerable during market disruptions.
During financial turbulence, equities typically fall first. As losses accumulate for leveraged investors, margin calls force them to liquidate other positions. Since Treasuries often appreciate during initial market stress, they become prime candidates for liquidation to raise cash.
As more investors sell Treasuries, prices can decline rapidly, causing the basis to fall below repo rates. What was once a risk-free profit becomes a guaranteed loss, accelerating selling pressure and potentially causing futures and spot prices to diverge significantly. Futures and repo markets then demand additional collateral; if hedge funds cannot meet these requirements, lenders seize and liquidate the pledged Treasuries, further driving yields higher in a self-reinforcing cycle.
This is precisely what transpired in April 2025. Basis trades work during normal times because financial institutions bear predictable liquidity costs in exchange for financing interest. When crises erupt, these costs explode, invalidating the trade’s fundamental premise.
Measuring Market Stress
We can gauge the severity of these liquidity shocks by tracking the spread between implied repo rates and the federal funds rate. Last month, after Trump announced a 90-day postponement of retaliatory tariffs, the CTD implied repo rate exceeded OIS by only 20–30 basis points, well below the extreme 200+ basis point spreads seen during 2020, suggesting the current situation remains manageable.
Another telling indicator is the spread between 2-year and 10-year Treasury yields. Two-year notes function essentially as cash equivalents with minimal leverage, predominantly held by foreign governments. Last month, while 2-year yields remained relatively stable, the yield curve steepened significantly, confirming that long-bond declines primarily stemmed from liquidity pressures at ordinary trading firms rather than sovereign selling.
If this represents merely a liquidity shock, which appears to be the case, the Federal Reserve has ample tools to address it, including relaxing bank leverage constraints. The Fed learned valuable lessons from 2020, when it went so far as to purchase high-grade corporate bond ETFs directly to stabilize markets.
Behind the Headlines: What Happened?
While media outlets fixated on geopolitical narratives, Financial Twitter and Reddit also exploded with doomsday scenarios:
“Donald Trump is alienating the world; dump U.S. Treasuries at once!”
“Time for a financial war against the U.S.; many countries’ nuclear option is Treasuries!”
“Trump will tax global holders of Treasuries — everyone’s rushing to sell!”
Here’s what triggered the sell-off:
1. The Basis Trade Implosion
At the epicenter lay the infamous “basis trade” — a supposedly low-risk arbitrage strategy where hedge funds buy Treasury cash bonds while simultaneously shorting higher-priced Treasury futures to capture the spread.
This strategy’s fatal flaw? Leverage. Lots of it.
As Jan Nevruzi, a rates strategist in New York, noted: “When significant movements occur and you depend on an arbitrage relationship, the tightening of spreads for any reason may necessitate a reduction in your positions.”
Translation: When panic strikes, even “risk-free” trades aren’t risk-free.
2. The Liquidity Vortex
The Treasury market’s sheer size — over $25 trillion — creates a dangerous illusion of infinite liquidity. But during stress events, that liquidity can evaporate with shocking speed.
Last month’s sell-off revealed how regulatory constraints imposed after 2008 have hampered banks’ ability to warehouse bonds during market stress. The Supplementary Leverage Ratio (SLR) requirements mean primary dealers can’t expand their balance sheets as freely as before.
When basis traders dumped their holdings, there simply weren’t enough buyers to absorb the supply without significant price concessions.
3. The Inflation Narrative Shift
While liquidity dynamics triggered the acute phase of the sell-off, a more fundamental concern was taking root: inflation anxiety.
Trump’s sweeping tariff proposals sparked immediate concerns about imported inflation. Markets quickly recalibrated their inflation expectations upward, reflecting the potential impact of 10–25% tariffs on thousands of imported goods.
This inflationary backdrop made longer-dated fixed-income instruments particularly vulnerable. When inflation rises, the fixed payments from bonds become less valuable in real terms — a reality that hit 30-year Treasury holders especially hard.
4. The Fiscal Reckoning
Perhaps most concerning was the market’s growing unease about America’s fiscal trajectory. With national debt exceeding $36 trillion and the deficit stubbornly high, investors began demanding higher term premiums — the extra yield required to hold longer-dated bonds.
Against this backdrop, the sell-off wasn’t just technical; it reflected genuine concern about America’s long-term fiscal health.
Historical Echoes: Crisis‑Driven Treasuries Selloffs
Treasuries have faltered in past upheavals:
Black Monday (1987): 10‑year yields jumped from ~7.5% to ~10.2%.
2008 Lehman Collapse: Yields plunged as investors piled in, then reversed post‑rescue.
COVID “Cash for Collateral” (2020): A dash‑for‑cash saw yields spike amid repo‑market dysfunction before a Fed backstop.
Yet April’s surge to >4.5% yields was more akin to a stress‑test of market plumbing than a pure flight‑to‑safety, presaging the need for robust liquidity facilities.
Did Foreign Powers Dump Treasuries?
Despite rampant speculation about foreign governments orchestrating a Treasury sell-off, the data tells a different story. Treasury Secretary Bessent confirmed there was no evidence of large-scale foreign selling during the April turmoil.
This shouldn’t be surprising. China holds roughly $700 billion in U.S. Treasuries — a significant sum, but only about 2% of the total market. More importantly, any coordinated selling would crater prices before most sellers could exit their positions, effectively destroying their wealth.
As one fixed-income portfolio manager at Pimco told: “The Treasury market is like a massive cruise ship. Foreign central banks would only hurt themselves by trying to capsize it.”
The truth is more nuanced: Foreign ownership of Treasuries has gradually declined over the past decade, reflecting a slow evolution rather than a sudden exodus. This trend bears watching, but doesn’t represent an imminent threat to market stability.
When Safe Havens Become Danger Zones
The April sell-off highlights an underappreciated market phenomenon: even safe-haven assets can become sources of volatility during extreme stress events.
During normal market environments and early crisis phases, Treasuries perform their safe-haven role admirably. We saw this in February 2020, when COVID fears drove Treasury yields to historic lows as investors sought safety.
But once a crisis intensifies beyond a certain threshold, the “dash for cash” can overwhelm everything else. In March 2020, Treasuries briefly sold off alongside stocks as investors liquidated whatever they could to raise cash. April’s episode followed a similar pattern, though driven more by leveraged unwinds than retail panic.
This pattern extends to other traditional safe havens:
Gold: Initially rallied during early COVID fears before suffering a sharp 10-day decline in March 2020, falling from $1,680 to $1,473. Many investors who thought they’d found sanctuary in gold suffered unexpected losses.
Japanese yen: Strengthened dramatically against the dollar before rapidly reversing when dollar funding stresses emerged, the yen rapidly depreciated from 103.08 to 111.71.
Swiss franc: Typically appreciates during crises but can experience violent reversals when liquidity tightens
The key insight: True diversification is harder than it looks, especially when you need it most.
The Dollar’s Future: Evolution, Not Revolution
Does the Treasury sell-off signal the beginning of the end for dollar hegemony? The evidence suggests we’re witnessing evolution rather than revolution.
While competing monetary arrangements like China’s Cross-Border Interbank Payment System (CIPS) have grown, they remain dwarfed by dollar-based networks. The fundamental economic realities that underpin dollar dominance persist:
The exporter’s dilemma: Countries running trade surpluses with the U.S. accumulate dollars that need to be invested somewhere.
The depth paradox: No other market offers the liquidity and scale required to absorb global capital flows.
The alternatives deficit: Neither the euro, renminbi, nor special drawing rights (SDRs) offer a compelling all-around alternative.
As one hedge fund manager put it: “Everyone wants an alternative to the dollar until they need to find one.”
Navigating the New Fixed-Income Reality
For investors, April’s Treasury shock offers crucial lessons that challenge conventional portfolio wisdom:
Duration Risk Has Teeth
Long-dated bonds proved far more vulnerable than many models predicted. While 2-year Treasury yields remained relatively stable during the sell-off, 10-year and 30-year bonds experienced brutal price declines.
This pattern underscores the wisdom of barbell strategies that combine short-duration instruments with selective longer-term positions rather than concentrating risk in the belly of the curve.
2. Liquidity Trumps Quality During Crises
When markets seize, liquidity often matters more than quality. The most liquid segments of the Treasury market — like on-the-run 2-year notes — weathered the storm far better than less-traded securities, regardless of their identical credit quality.
Smart investors maintain liquidity buffers and favor on-the-run issues during uncertain times, even at slightly lower yields.
3. Diversification Requires Imagination
True portfolio protection requires thinking beyond the traditional 60/40 stock/bond mix. Consider:
Inflation-linked securities: TIPS outperformed nominal Treasuries during the sell-off
Short-duration credit: Investment-grade floaters and short-term corporates provided stability
Cash instruments: T-bills and money market funds demonstrated their worth as portfolio stabilizers
Option-based strategies: Targeted hedges against both equity and bond volatility proved valuable
The key is recognizing that no single asset class offers perfect protection in all scenarios.
4. Beware Hidden Leverage
The basis trade implosion demonstrates how seemingly conservative strategies can harbor substantial hidden risks when executed with leverage. As veteran bond trader Stanley Druckenmiller once observed: “The riskiest investments are often those perceived as the safest.”
This applies not just to direct investments but also to investment vehicles. Some “conservative” fixed-income ETFs and mutual funds employ leverage or derivatives that can amplify volatility during market stress.
Three Scenarios for the Treasury Market
As markets digest April’s shock, three potential paths emerge:
Scenario 1: The Liquidity Snap-Back
The most optimistic view sees April’s sell-off as primarily technical rather than fundamental. As basis trades unwind and positioning normalizes, yields could stabilize or even decline, especially if economic data softens.
Supporting this view is the Federal Reserve’s arsenal of tools to address market dysfunction, including relaxing bank leverage limits and, in extreme cases, direct market intervention through asset purchases.
Scenario 2: The New Yield Regime
A more concerning possibility is that we’ve entered a new regime of structurally higher yields driven by persistent inflation and fiscal concerns. In this scenario, the decades-long bond bull market has truly ended, and investors face a prolonged period of fixed-income underperformance.
This outcome would force a fundamental rethinking of portfolio construction across the investment landscape.
Scenario 3: The Rolling Crisis|
Perhaps most troubling is the possibility that April’s volatility was just the first tremor in a series of market dislocations. Having identified the Treasury market’s vulnerabilities, speculators could target the long end of the curve repeatedly, creating periodic volatility spikes.
This scenario would challenge the very foundation of modern portfolio theory and potentially accelerate the search for dollar alternatives.
Investment Implications: Four Recommendations
Based on this analysis, here are four practical investment recommendations:
The Long Bond Crisis Isn’t Over
Now that markets have identified bonds as Trump’s “soft spot,” this vulnerability may face repeated attacks, increasing volatility in long-term bonds. However, yields won’t breach certain thresholds, as the Federal Reserve possesses abundant tools to prevent systemic failure.Focus on Short-Term Bonds for Dollar Creditworthiness Assessment
Long bonds’ volatility stems from their speculative nature, while short bonds remain more tethered to economic fundamentals, with less leverage and greater stability. During the March 2020 crash, short-term Treasuries were the only “safe-haven assets” maintaining relatively consistent performance. Berkshire disclosed that the funds consist of $14.4 billion in cash-equivalent bonds (maturing in under three months) and $286.47 billion in specialized short-term government bonds.Gold Isn’t Absolutely Safe
Currently, the only pure safe-haven asset (with short-term Treasuries as a partial alternative), gold has attracted substantial capital, including speculative money. But when a safe asset rises too rapidly, it inherently becomes less safe. A sudden sell‑off — triggered when gold is effectively “smothered” by an overwhelming tide of so‑called safe‑asset demand — can morph into a textbook liquidity crisis.Maintain Perspective
This analysis provides a comprehensive framework for understanding recent market dynamics without resorting to conspiracy theories or oversimplified narratives. While challenges exist in the Treasury market, the fundamental architecture of the international financial system remains intact, at least for now. or after April’s volativity, institutional firms still find that the US Dollar is still safe, the US index rise sharply, back to 108 or above.
Conclusion
Let me state the most important conclusion upfront: At least for now, these apocalyptic scenarios won’t materialize. U.S. Treasury bonds remain a safe asset class.
That said, these rumors didn’t emerge from thin air. The trading dynamics of U.S. Treasuries have indeed shifted from their traditional role as safe-haven assets to reflect increasing concerns about U.S. fiscal credibility. This shift has led some investors to sell Treasury holdings, signaling diminished confidence in American policy direction. The status of the dollar and Treasuries as risk-free assets has been challenged, but not yet overthrown.
For investors holding Treasury-backed products, this perspective offers valuable context. While market volatility may continue, the fundamental safety of U.S. government debt remains intact. This isn’t 2008, and it’s not a systemic collapse of American creditworthiness. It’s a liquidity-driven technical correction in a complex, interconnected global market.
Understanding these dynamics helps separate signal from noise in an increasingly chaotic financial landscape. The next time headlines scream about Treasury market collapse, you’ll know what’s happening beneath the surface.
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