The Paradox of Stability: Why U.S. Treasuries Hold Steady Amid Trump's Institutional Erosion

The Trump era introduced a litany of challenges to U.S. institutional credibility—from trade wars to executive overreach—yet Treasury yields have remained remarkably stable. This resilience defies conventional logic: why would investors continue to trust a government perceived to be eroding its own fiscal and legal foundations? The answer lies in the interplay of short-term market dynamics, the lack of viable alternatives, and the enduring inertia of global capital flows. But as the search for a new “risk-free” asset intensifies, the era of U.S. Treasury dominance may be nearing its twilight.

The Stability Paradox: Term Premiums and Investor Psychology

Despite Trump's aggressive policies—such as tariffs, fiscal stimulus, and clashes with judicial independence—the U.S. Treasury market has not collapsed. A key indicator, the term premium (the extra yield investors demand for long-term bonds), remained stubbornly positive even as yields dipped post-inauguration. This suggests that while investors were uneasy about policy risks, they still viewed Treasuries as the least-bad option.

The New York Fed's term premium model reveals a critical detail: after Trump's tariffs in 2021, the risk premium surged nearly 60 basis points within months, reflecting acute market turbulence. Yet this spike was short-lived, underscoring a broader truth. While investors may question U.S. fiscal discipline, they lack better alternatives. “The world still has nowhere else to go,” says AXA's David Page.

Institutional Erosion and the Limits of Market Vigilantes

Trump's legacy includes a “credibility recession,” as Stanford's Amit Seru terms it. Policies like Section 899's punitive taxes on foreign investors, coupled with widening fiscal deficits (projected to push U.S. debt to 124% of GDP by 2025), should, in theory, spook bondholders. Yet foreign ownership of Treasuries has only declined modestly, from 30% to 27% since 2020.

This inertia reflects a paradox: while institutional weakening raises long-term risks, the absence of scalable alternatives keeps investors anchored. The eurozone's fragmented bond markets, for instance, offer €10 trillion in government debt but lack liquidity and a unified fiscal framework. The ECB's dominance (holding 35% of eurozone bonds) limits their appeal to global investors, as does the region's economic divergence.

The Search for a New “Risk-Free” Asset: Why Nothing Sticks

The quest for alternatives to Treasuries has produced three contenders, each flawed:

1. Eurobonds: The €468 billion SURE and NextGenerationEU programs are dwarfed by U.S. debt issuance. Even if European bonds gained traction, their liquidity remains inferior.
2. Chinese government bonds: China's $3 trillion in central government debt is overshadowed by capital controls and the renminbi's non-convertibility. Foreign ownership hovers at just 7%, and inclusion in global indices has been tepid.
3. Cryptocurrency: While Bitcoin's volatility and regulatory ambiguity make it a poor substitute for Treasuries, its rise reflects a broader skepticism of fiat currencies.

Gold, traditionally a safe haven, hit $3,300/oz in 2024 but lacks yield and scalability for reserve management.

Investment Implications: Between Inertia and Innovation

For now, Treasuries' stability is a function of their incumbency. Central banks, despite reducing dollar holdings (from 72% in 1999 to 58% in 2025), have no clear replacement. But investors should prepare for a gradual shift:

• Short-term: Maintain Treasury exposure for liquidity and diversification, but hedge with inflation-linked bonds (TIPS) to guard against fiscal slippage.
• Long-term: Gradually allocate to eurozone and Japanese bonds (which, while less risky than Treasuries, offer similar yields and lower geopolitical baggage). Monitor China's bond market liberalization—though progress is glacial.
• Speculative plays: Use futures or ETFs to bet on gold's cyclical rallies, but avoid cryptocurrencies for core portfolios.

Conclusion: The End of an Era, but Not Yet

The U.S. Treasury market's stability is a testament to its unmatched depth and the lack of alternatives. But as institutional trust continues to fray—whether under Trump or future leaders—the era of Treasuries as the “risk-free” benchmark will end. The transition will be bumpy, but investors who diversify thoughtfully now will be best positioned to navigate a multipolar financial system.

In the coming years, the question is not whether Treasuries will lose their crown, but whether the world will find a viable successor—or descend into a fragmented, volatility-driven regime. The answer will shape investing for decades.