US Treasury Market Outperforms Global Bonds, Hits Best Returns Since 2020
The U.S. Treasury market has emerged as the top performer among developed bond markets this year, delivering a robust 6 percent in total returns — making 2023 its strongest showing since the pandemic-influenced markets of 2020, Treasury Secretary Scott Bessent announced this week.
In remarks that highlighted the Treasury’s central role in global finance, Bessent emphasized how Treasury yields effectively set the world’s risk-free rate, cascading through the entire financial ecosystem. “Domestically, the risk-free rate sets the pricing for everything else: from bank loans and home mortgages to stocks and corporate bonds,” he stated, underscoring the direct impact on everyday affordability for American families and businesses.
Trillion-Dollar Daily Trading
How big is the Treasury market really? Daily trading volumes now average around $1 trillion per day in cash securities alone, with associated derivatives representing another substantial source of liquidity, according to Treasury data. This massive scale reflects both the market’s depth and its critical importance to global finance.
Meanwhile, money market funds have swelled to approximately $7.5 trillion, adding nearly $1 trillion just in the past year. The stablecoin market, currently valued around $300 billion, “could grow tenfold by the end of the decade thanks to the innovation made possible by the GENIUS Act,” Bessent explained.
Foreign investor confidence remains strong, with international holdings of Treasury securities reaching record levels. “We continue to see robust demand at Treasury auctions from a wide range of investors,” Bessent noted, pointing to this as evidence of continued global faith in American debt instruments despite persistent concerns about deficit levels.
Borrowing Costs Decline
In a positive development for the government’s financing costs, U.S. borrowing expenses across the entire yield curve have decreased year-to-date. The 10-year term premium has remained “basically unchanged while US borrowing costs across all other areas of the curve, from 2-year notes all the way to 30-year bonds, are down,” according to Bessent’s remarks.
This favorable environment has given the Treasury Department breathing room in its debt management strategy. The department has provided forward guidance that “we will likely not need to change coupon auction sizes for at least the next several quarters,” Bessent confirmed.
Several factors have contributed to this flexibility, including recent deficit reduction and the Federal Reserve’s decision to purchase Treasury bills using proceeds from their mortgage-backed securities holdings. These developments have “given us additional time and flexibility before we need to make any such decisions,” Bessent observed.
Economic Growth Essential for Stability
But the Secretary’s comments weren’t all rosy. Bessent warned that economic stagnation poses significant risks to the financial system. “Stagnation can make it harder for businesses and consumers to service private debt. It can raise questions about the sustainability of public debt,” he cautioned, adding that such conditions can “dampen earnings expectations, reducing asset values” and lead investors to demand higher risk premiums.
That warning takes on added urgency in light of the ongoing government shutdown. “We’ve seen an impact on the economy from day one, but it’s getting worse and worse,” Bessent told reporters. Despite what he called a “fantastic economy under President Trump the past two quarters,” estimates now suggest that “economic growth for this quarter could be cut by as much as half if the shutdown continues.”
The juxtaposition is stark: a Treasury market performing at its best since 2020, while a government shutdown threatens to slash economic growth. For investors and policymakers alike, it’s a reminder that even in times of market strength, political uncertainty can quickly change the economic calculus.
