Decline in U.S. debt safe-haven status? Demand remains sluggish amid escalating Middle East conflict; 10-year yield rises to over a month high

Amid escalating tensions in the Middle East and increased volatility in global financial markets, U.S. Treasury bonds, a traditional safe-haven asset, have failed to attract inflows. Two consecutive poor auction performances further pushed bond prices lower and yields higher.

According to Cninfo, the U.S. Treasury auctioned $39 billion of 10-year Treasury bonds on Wednesday, following the sale of $58 billion of 3-year Treasury bonds the previous day. Normally, conflicts in the Middle East and their impact on the stock market would prompt investors to shift toward safe-haven assets like U.S. Treasuries, but market reactions this time have been the opposite, with weak demand for Treasuries.

In the Wednesday auction, the final winning yield was 4.217%, 0.6 basis points above the market yield before the auction. A yield higher than the market level typically indicates insufficient demand, as the U.S. Treasury needs to offer higher yields to attract investors.

In fact, demand for the 3-year Treasury auction the day before was also poor, indicating a general cooling of investor interest in U.S. Treasuries.

Weak demand led to falling bond prices, and since bond prices and yields move inversely, yields rose accordingly. The 10-year Treasury yield briefly climbed to 4.225%, the highest intraday level since February 9.

Analysts suggest that investors may not currently see a clear value advantage in buying 10-year Treasuries. The spread between 2-year and 10-year yields is only 0.5734 percentage points, significantly narrower than the 0.728 percentage points from a month ago, which had reached its highest level since January 2022.

A narrowing spread means investors are earning less extra return for taking on the risks of longer-term bonds, reducing the attractiveness of long-term Treasuries.

Additionally, a recent surge in corporate bond issuance may have diverted funds. The market is digesting a wave of new corporate bond supplies, including bonds recently issued by Amazon (AMZN.US). These high-rated corporate bonds have attracted some funds that might otherwise have flowed into U.S. Treasuries.

U.S. Treasuries have long been regarded as one of the safest government debt assets globally, often favored during geopolitical tensions. However, since the outbreak of the Middle East conflict, U.S. Treasury prices have continued to decline, and poor recent auction demand has further weakened their appeal as a safe-haven asset during market turmoil.