By Davide Barbuscia
NEW YORK (Reuters) – Investors have been flocking to U.S. Treasuries as a safe haven due to market turmoil fueled by President Donald Trump’s trade policies, but a looming debt ceiling debate and ongoing political brinkmanship are stark reminders that even the world’s ultimate risk-free asset is not immune to cracks.
The $28.5 trillion U.S. Treasury market is the world’s largest bond market, known for its liquidity and stability, allowing investors to quickly move large sums of money. Yet there are a number of issues that could challenge views on the safety of U.S. debt securities.
Chief among them is the debt ceiling, a self-imposed borrowing cap that requires congressional approval to be suspended or raised. A debt ceiling showdown in 2023 spurred a sell-off in stocks and bonds, pushed the U.S. to the brink of default and hurt its credit rating.
Rising debt levels in recent years have undermined the sovereign credit profile, said Monica Defend, head of Amundi Investment Institute.
“But the bigger threat is the possibility of a technical default due to political arguments over the debt ceiling,” Defend said. In 2023, Congress lifted the debt ceiling until January 1, 2025, meaning lawmakers must revisit the issue later this year to prevent a default. Some analysts estimate the X date, when the government runs out of funds to meet all of its debt obligations, could be around July or August.
Meanwhile, the threat of a government shutdown, averted at the last minute last week, was a reminder for investors of the ongoing congressional brinkmanship that has contributed to global ratings agencies’ moves to downgrade the United States’ once top-tier credit rating.
Despite Republican control of Congress, political polarization remains a key concern, as policy reforms often require bipartisan consensus, said a source at a major ratings agency, speaking on condition of anonymity.
Harrison Fields, a White House spokesperson, said Trump is committed to restoring fiscal credibility.
The recent fall in long-term U.S. interest rates since he returned to the White House on January 20 is a sign of market confidence in his policies, Fields said, pointing to a decline in the term premium, which measures what investors charge for holding debt for a longer period of time, as further evidence.
INSTITUTIONAL STRENGTH
Treasuries have rallied recently as Trump’s unpredictable tariff moves stoked fears of a trade war and potential recession, driving investors into the perceived safety of U.S. government debt. At the same time, sovereign credit default swaps (CDS) – a key measure of credit risk – have edged to their highest since early November, when the cost of insuring against a default rose amid election and debt ceiling jitters.
“USA CDS spreads tend to trade at very tight levels except during periods of debt ceiling concerns. And as of today, the debt ceiling has not been raised,” said Jigar Patel, a strategist at Barclays.
Beyond political disputes, future ratings actions will depend on clarity around the U.S. fiscal path, said the source at the ratings agency. Republicans are pushing a $4.5 trillion tax cut extension, but its impact on deficits remains uncertain without major spending cuts, which could clash with Trump’s pledges to protect social programs.
Additionally, institutional strength and government checks and balances are under scrutiny, said the source. One area of focus is how the newly established Department of Government Efficiency (DOGE), led by Elon Musk to reduce wasteful spending, might influence policy decisions and shift the balance of power within the government, the source added.
Moody’s, the last major agency that rates U.S. sovereign debt at the top triple-A rating, cut its outlook to “negative” in November 2023. Fitch downgraded the U.S. credit rating earlier that year, following a debt ceiling standoff, while S&P Global Ratings has warned that rising deficits and political gridlock could pressure its AA+ rating.
CREDIBILITY
Another potential risk to the bond market is the Trump administration’s willingness to explore unconventional strategies to manage U.S. debt, analysts and investors said.
One idea gaining traction among market participants is that Trump might leverage the threat of tariffs and U.S. security alliances to persuade foreign governments to swap their Treasury holdings for lower-cost century bonds.
“How that would work is not clear, but I can’t imagine it would be good for the confidence of U.S. bondholders,” said Steven Zeng, U.S. rates strategist at Deutsche Bank.
Trump has at times criticized the Federal Reserve and pressured it to lower interest rates. In recent weeks, Trump and Treasury Secretary Scott Bessent have pledged to contain the 10-year Treasury yield, a building block for the financial system and a benchmark for consumers’ borrowing costs.
“If you really are concerned about keeping the 10-year low, you can double down on credibility,” said Ben Harris, vice president and director of economic studies at Brookings, who recently served as chief economist at the Treasury Department.
This could be achieved by pledging to maintain the independence of the Federal Reserve, or through a timely and responsible budgeting process, he said.
“There’s an inconsistency between their stated aspiration and their policy approach,” said Harris.
(Reporting by Davide Barbuscia; Editing by Megan Davies and Andrea Ricci)
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