The Case for Treasuries

It’s time to clear up one of the biggest misunderstandings in capital markets today. It’s a misunderstanding that can lead to disastrous results for investors if not explained and viewed correctly.

We all know that the U.S. national debt just crossed the $37 trillion mark. It’s growing so fast that it will hit $38 trillion not long after you read this. The debt has gone up millions of dollars while I’ve been writing this. Despite the work of DOGE and the White House, Trump’s Big Beautiful Bill will add even more to debt and deficits.

At the same time, the U.S. has weaponized the dollar in the geopolitical battlespace. We’ve put economic sanctions on Russia, secondary sanctions on China, and worked with NATO to steal $300 billion in lawfully purchased U.S. Treasury securities from Russia. All of these sanctions were facilitated by the role of the U.S. dollar as the leading reserve currency.

This combination of seemingly out-of-control debt and deficits and a weaponized dollar have caused many countries to re-think their dollar reserve holdings. This is part of the explanation for the massive accumulation of gold bullion by major central banks and finance ministries. Gold has no yield but it serves as an everything hedge against inflation, war, social unrest and natural disaster. Best of all, gold is physical, not digital, and cannot be frozen, seized or confiscated by political enemies. If you have physical gold in secure vaults, it’s yours short of a full-scale invasion of your country.

The description above is accurate. Debt and deficits are growing. The dollar has been weaponized. Central banks and finance ministries are accumulating enormous amounts of gold. The problem is that these facts have given rise to a narrative that is completely false. And it’s a narrative that could lead investors to significant losses in the months ahead.

The Narrative

The narrative goes like this: The days of the dollar as the leading reserve currency are coming to an end. Countries are eagerly seeking alternatives (in addition to gold), which could include cryptocurrencies or a new currency being planned by the BRICS. The euro has been strong against the U.S. dollar for the past six months and euro-denominated bonds issued by Germany and Italy may offer another investment avenue. China has been promoting the yuan as a payment currency with potential to become a reserve currency in future. Russia, Iran and other countries are seeking a way out from under U.S. dollar sanctions. Putting all of these factors together, it appears that the move away from the U.S. dollar is in full swing.

Another part of the narrative is that U.S. debt and deficits have spooked the bond market. The so-called bond vigilantes are ready to dump U.S. Treasuries or at least demand higher interest rates to own them. These higher rates will make the U.S. deficit even worse and set off a debt death spiral that will end in hyperinflation or U.S. default.

So, the world is ditching the dollar and U.S. institutions are ditching U.S. bonds. The sky is about to fall. Investors have been encouraged to dump Treasuries, buy stocks and enjoy the show.

Here Are The Facts

Interest rates on U.S. Treasuries have not been soaring. In fact, they’ve been falling sharply at the short-end of the yield curve and coming down gradually in the intermediate sector (5-year and 10-year maturities).

The yield-to-maturity on the 10-year U.S. Treasury note was 4.5% in mid-April. Today, it’s 4.25%. That’s not a sell-off; that’s a rally. Bond prices move inversely to rates so investors in U.S. Treasury had nice capital gains on that rate decline.

The yield-to-maturity on the pivotal 2-year U.S. Treasury note was 4.0% in mid-April. Today it’s 3.75%. Another rally. The yield on the 3-month Treasury bill at the short end of the yield curve was 4.38% in mid-May and sits at 4.30% today. Another capital gain for investors.

So, where’s the selloff in Treasuries? It doesn’t exist. The term “bond vigilantes” was coined in the 1980s in response to hyperinflation in the late 1970s. The bond vigilantes haven’t saddled up since then. That’s ancient history. Treasuries are performing strongly – rates down and prices up producing gains for investors. The bond sell-off part of the narrative is simply false.

What about the “end of the dollar” part of the narrative. Here are the facts: The BRICS are not creating a new currency. They may in time, but that can take ten years to develop (based on the euro) and thirty years to replace an existing dominant reserve currency (the time it took sterling to decline from 1914-1944). So, don’t hold your breath for that.

The BRICS are buying gold, but we’ve already acknowledged that gold is an alternative to the dollar. But there are limits on that since gold cannot be used for payments unless physically transferred. And massive gold sales for cash would sink the price. Gold is a monetary asset, but it does not replace cash.

The dollar doom crowd points to another data set instead. They look at the Treasury International Capital System (TIC), which is a periodic report of holdings of U.S. Treasury securities by major holders. By comparing TIC reports over time, you can ascertain if foreign central banks are increasing or decreasing their holdings.

According to the most recent TIC report, Chinese holdings of Treasuries declined from $759 billion at the end of 2024 to $757 billion at the end of April 2025 (most recent data available). Hong Kong holdings declined from $255 billion at the end of 2024 to $247 billion at the end of April 2025. South Korean holdings of Treasuries declined from $124.9 billion to $121.7 billion over the same four-month period. Treasury holdings by Saudi Arabia declined from $137.5 billion to $133.8 billion in the same period.

Aha! The dollar doom crowd point to these declines in Treasury holdings as proof that foreign central banks are dumping U.S. Treasuries ahead of an impending loss of confidence in the U.S. dollar and dollar-denominated Treasury securities. Case closed.

There are numerous flaws in this part of the narrative. It is true that Treasury holdings decreased from December to April in the countries noted above. But Treasury holdings increased over the same period in the UK, Belgium, Cayman, Luxembourg, France and Switzerland. So, the dumping narrative does not hold up when a broader list of countries is considered. Importantly, Belgium, Cayman and Luxembourg are well-known tax havens or clearing centers that act as proxies for holdings by China and major hedge funds. It’s difficult to conclude that China is reducing its Treasury holdings without more information about the true owners behind the Cayman Islands accounts.

The Real Reason for Dumping Treasuries

There’s an even more powerful refutation of the narrative that reduced Treasury holdings mean a run on the dollar. Even in the face of reduced Treasury holdings by a major foreign holder, one must ask why? The narrative says the holder is dumping Treasuries and fleeing the dollar. The opposite is true.

Central banks do not actually hold dollars in their reserve accounts. They hold dollar-denominated securities mostly U.S. Treasuries. There’s a difference. Dollars are cash, which can be held in the form of bank deposits, money market funds or short-term Treasury bills in 4-week maturities. Treasury securities are often 2-year, 5-year, or 10-year maturity notes or even 30-year bonds. Those securities are safe and liquid but they’re not cash.

When China sells Treasury securities, they do so to get cash to prop up their currency or bail out their banks. They’re not running from Treasuries; they wish they had more. The reality behind the curtain of the international monetary system is that there’s a global dollar shortage, which is bordering on a major monetary liquidity crisis. Selling Treasuries is a way to get cash in a world that is starving for dollars. Far from a sign that the dollar is in decline, these sales of Treasuries are symptomatic of a world that needs more dollars, not fewer.

A Good Set-up For Investors

As usual, the narrative bears no relationship to reality. The narrative claims the dollar is about to be abandoned as the global reserve currency and bond vigilantes are demanding higher interest rates on Treasuries. The reality is that central banks are starved for dollars and interest rates are declining and will decline further. This is a set-up for capital gains for those who invest in Treasury securities today.

Don’t follow the Global Reset crowd at the moment. The dollar and Treasury securities are doing just fine. So will investors who buy them now.