Will the role of US Treasuries forever change in Ukraine?

With the ongoing conflict between Russia and Ukraine, another asset has surprisingly turned into a weapon: US Treasuries. Thus, in the future, it is worth thinking about their role and their real value.

Ukraine war says goodbye to sovereign immunity

If you are a country or central bank that holds U.S. Treasury bills or other government debt with a bank beyond your own borders, you now know that these can be seized by the United States. or the European Union.

This means at least three things:

1. US Treasuries can no longer be considered “neutral currency”

2. Holding US Treasuries could be a painful bad idea going forward, a security risk even, especially for countries that may have (or potentially have) some sort of conflict with the US.

3. Holding US Treasuries results in a loss of purchasing power as it can easily be said that their yields are trading well below the rate of inflation (ex: 10y is at 1.74% against a CPI of 7.50%).

China should take notes with changing US Treasuries

China holds about $1 trillion in US Treasuries and has just seen what was once considered a sacrosanct asset, the backbone of the global financial system, frozen or, depending on interpretations, weaponized.

The rules of the game seem to have changed as the freezing of assets was previously limited to individuals (like the oligarchs) but with these new developments it is safe to say that it calls into question the entirety of the global financial system based on the US dollar as the assumption that central banks hold US Treasury bonds as a reserve asset is now questionable.

So, which places remain so neutral? Where should central banks store their reserve assets?

Well, physical gold immediately comes to mind, but neutrality in its most authentic form can still be found in Bitcoin (in theory at least). However, an important point needs to be made: Bitcoin still seems to be correlated with the stock market, which means that if we are in fact facing a liquidity crisis, Bitcoin might just be out of reach to be a completely safe haven asset. and still see a fall if the market crashes.

When the major global reserve can simply be “cancelled”, its fragility becomes quite evident and financial contagion might even be a possibility as the global economic system finds itself hugely indebted.

As a result, gold remains the legacy asset and Bitcoin is likely to become increasingly important as its demographic tailwinds begin to kick in.

Could this mean that a global currency reset could be in the works?

While the FED is hawkish, the conflict and its sanctions seem to have the potential to spread.

One cannot simply ignore how incredibly interconnected global markets have become. Also, high leverage seems to be a constant in all of them, so if institutions hold holdings in Russian banks or Russian stocks, things could go wrong.

Going forward, one should certainly be prepared for extreme volatility.

And as Russia will start to sneeze, surely we hope the rest of the world doesn’t catch a cold.

With the ongoing conflict between Russia and Ukraine, another asset has surprisingly turned into a weapon: US Treasuries. Thus, in the future, it is worth thinking about their role and their real value.

Ukraine war says goodbye to sovereign immunity

If you are a country or central bank that holds U.S. Treasury bills or other government debt with a bank beyond your own borders, you now know that these can be seized by the United States. or the European Union.

This means at least three things:

1. US Treasuries can no longer be considered “neutral currency”

2. Holding US Treasuries could be a painful bad idea going forward, a security risk even, especially for countries that may have (or potentially have) some sort of conflict with the US.

3. Holding US Treasuries results in a loss of purchasing power as it can easily be said that their yields are trading well below the rate of inflation (ex: 10y is at 1.74% against a CPI of 7.50%).

China should take notes with changing US Treasuries

China holds about $1 trillion in US Treasuries and has just seen what was once considered a sacrosanct asset, the backbone of the global financial system, frozen or, depending on interpretations, weaponized.

The rules of the game seem to have changed as the freezing of assets was previously limited to individuals (like the oligarchs) but with these new developments it is safe to say that it calls into question the entirety of the global financial system based on the US dollar as the assumption that central banks hold US Treasury bonds as a reserve asset is now questionable.

So, which places remain so neutral? Where should central banks store their reserve assets?

Well, physical gold immediately comes to mind, but neutrality in its most authentic form can still be found in Bitcoin (in theory at least). However, an important point needs to be made: Bitcoin still seems to be correlated with the stock market, which means that if we are in fact facing a liquidity crisis, Bitcoin might just be out of reach to be a completely safe haven asset. and still see a fall if the market crashes.

When the major global reserve can simply be “cancelled”, its fragility becomes quite evident and financial contagion might even be a possibility as the global economic system finds itself hugely indebted.

As a result, gold remains the legacy asset and Bitcoin is likely to become increasingly important as its demographic tailwinds begin to kick in.

Could this mean that a global currency reset could be in the works?

While the FED is hawkish, the conflict and its sanctions seem to have the potential to spread.

One cannot simply ignore how incredibly interconnected global markets have become. Also, high leverage seems to be a constant in all of them, so if institutions hold holdings in Russian banks or Russian stocks, things could go wrong.

Going forward, one should certainly be prepared for extreme volatility.

And as Russia will start to sneeze, surely we hope the rest of the world doesn’t catch a cold.

Rebecca R. Santistevan