Why Do People Invest in US Treasuries Despite Low Yields?

For many investors, the allure of the US Treasury market remains strong, even when yields are very low, typically around 2-3%. This puzzled many who wonder why investors would put their money into such an investment when the returns are so minimal. This article explores the rationale behind these investment strategies and delves into the dynamics of the treasuries market.

Understanding the Safety and Certainty of US Treasuries

One of the primary reasons investors choose to invest in US Treasuries is the unparalleled safety and certainty they offer. Unlike other investments that carry a risk of capital loss, US Treasuries come with a guarantee that the principal will be returned. The yields, though low, are also highly secure and assured, making them a preferred choice for many investors.

The Role of Traders in the US Treasury Market

Despite the perception of treasuries as long-term investments, the market is heavily influenced by daily trading activities. According to a seasoned trader, the daily trading volume of US Treasuries often exceeds $500 billion, with that figure significantly higher when including trades in dark pools. This high level of liquidity is indicative of a market driven by traders rather than long-term investors.

Traders seek to capitalize on the fluctuations in the market, buying low and selling high, making small profits on each trade. This active trading is a stark contrast to the traditional view of investors holding onto treasuries for extended periods. The market landscape has changed in the past few decades, and it's essential to adapt one's understanding of treasuries to fit this new reality.

Other Investments and the Decline of Other Safe Havens

In the past, US Treasuries competed with other safe-haven investments such as German Bunds, British Gilts, and the Swiss Franc. However, with the introduction of the euro, the attractiveness of Bunds declined. Additionally, British Gilts have a smaller market compared to US Treasuries, making them less appealing. The Swiss Franc, once a popular choice, no longer serves as a safe-haven investment due to the country's efforts to distance itself from the role of a risk-off trade.

This leaves US Treasuries as the last best safe harbor, especially during periods of elevated macroeconomic risk. The global financial landscape is filled with numerous macroeconomic events and threats, but the situation is compounded by a global pandemic. This has led to a high demand for US Treasuries, despite their low yields.

The low yields on the 10-year note reflect this high demand, driven by the so-called "risk-off" trades. When investors perceive macroeconomic risks, they tend to sell risk assets and seek safe-haven investments like US Treasuries. The continued preference for these bonds reflects a lack of alternatives and a desire for guaranteed returns.

Conclusion

US Treasuries remain a popular investment choice, despite their low yields, driven by their unparalleled safety, the active trading market, and their role as a safe-haven asset. Understanding the dynamics of the market and the evolving investment landscape is crucial for those looking to make informed decisions about their investments in these government securities.

Keywords: US treasuries, low yields, investment strategies