Chart of the Week: The allure of the US Treasury bond

U.S. Treasury bonds are considered safe, convenient, and easy to trade, making them the preferred choice over other low-risk investments. Their yield is relatively low but this ‘convenience yield’ reflects the implicit premium that investors are willing to pay to hold Treasuries, compared to less liquid assets like AAA corporate bonds. This yield typically peaks during recessions or indeed before (such as before the 2001 dot-com crash). In recent years, the rotations of the convenience yield and of the equity market have continued to respond to the same underlying economics The key driver behind this is whether investors expect earnings and revenue growth to be broad-based or concentrated in safe assets. When growth is anticipated to be scarce and concentrated among safe assets, investors flock to U.S. Treasuries while, for the same reasons, value stocks lose ground to growth stocks. Conversely, when growth is expected to be strong and widespread, investors move away from Treasuries, favouring value stocks as they promise better risk-adjusted returns than growth stocks. A notable shift occurred in November 2024, with value stocks outperforming growth. However, by December amid revived inflation expectations and reduced rate-cut forecasts, value stocks lost these gains and demand for US Treasuries jerked up. The latest rotation back to value stocks suggests a reinvigorated anticipation of a better outlook for more corporates — which potentially tags along with lower demand for the ‘convenience’ of U.S. Treasuries.

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The views expressed in this article are the views of the author, not necessarily those of LSEG.

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