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How US Treasuries Can Remain the World's Safe Haven

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  • Darrell Duffie

Abstract

Weaknesses in the design of the market for US Treasuries have reduced the effectiveness of world's favored safe-haven asset. Since the Global Financial Crisis, the market's intermediation capacity is far more constrained by the balance sheets of dealer banks, which handle virtually all investor trades. Since 2007, the total size of primary dealer balance sheets per dollar of Treasuries outstanding has shrunk by a factor of four. This trend continues because of large US fiscal deficits and post-GFC regulatory capital constraints, which are necessary for financial stability but limit the provision of liquidity under stress. For US Treasuries to remain a powerful safe haven, the intermediation capacity of the market will need to be expanded and further supported by official-sector backstops.

Suggested Citation

  • Darrell Duffie, 2025. "How US Treasuries Can Remain the World's Safe Haven," Journal of Economic Perspectives, American Economic Association, vol. 39(2), pages 195-214, Spring.
    • Handle: RePEc:aea:jecper:v:39:y:2025:i:2:p:195-214
    DOI: 10.1257/jep.20241412
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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