Treasuries and the US dollar—safe havens that have long moved in parallel—are on the road to divorce.
A persistent gap between the value of the dollar, the modern world’s bedrock currency, and US Treasuries began after the 2008 global financial crisis and widened further around 2015, says research by Harvard Business School Professor Wenxin Du. The trend continued in 2020 as the US government borrowed at rock-bottom rates to prop up the economy amid the COVID-19 pandemic.
Investors now see more risk in owning US government-issued debt, which could raise questions about future borrowing, write Du and collaborators Ritt Keerati, economist for the Board of Governors of the Federal Reserve System, and Columbia Business School Associate Professor Jesse Schreger in “Decoupling Dollar and Treasury Privilege.” The Fed formally released the working paper in December.
Traditionally, investors have accepted a lower yield—or interest rate—for Treasuries because of their perceived safety and liquidity. Buy a Treasury and you could sell or pledge it almost instantly for cash anywhere in the world. Today, that "convenience yield” has disappeared amid record US debt.
Treasuries help stabilize the US economy, covering funding gaps and providing a source of stimulus during crises. The findings come as US policymakers and central bankers wrestle with inflation concerns, rising unemployment, and geopolitical uncertainty.
Two factors speeding decoupling
The value of Treasuries should track the value of the dollar, but two factors have pushed them apart:
Scarcity in dollar lending
Regulations enacted in the wake of the 2008 global financial crisis limited banks' ability to lend in US dollars. The premium that buyers outside the US pay to acquire dollars rose as lending capacity shrank.
Oversupply of Treasuries
Starting in 2008, the US issued massive amounts of Treasuries, flooding the global market and lowering their value, making them less “special” than other instruments used as dollar equivalents. The outstanding value of Treasury bonds reached $29 trillion in 2025, up from $5 trillion in 2008.
Measuring the waning appeal of Treasuries
To compare the two forms of American financial “privilege”—the unique global clout of the dollar and Treasuries—the authors used a tool called covered interest parity deviations.
Think of it this way: If you are a European investor who wants to earn a dollar return, you have two choices:
Buy a US government bond directly.
Buy a German government bond and use currency markets to convert your euros into dollars, creating what researchers call a "synthetic" dollar investment.
If US and German government bonds are equally desirable, both strategies should produce the same return. When they don’t, and investors willingly accept a lower return to hold a real US government bond instead of the synthetic alternative, that gap is the Treasury "convenience yield.” It measures the premium the world places on holding US government bonds.
Treasuries have lost ‘specialness’ in the international comparison, in the sense that bond investors need to be incentivized with extra return for holding the actual Treasury.
For most of the pre-2008 era, that premium was real and meaningful. Investors accepted lower yields on US government bonds because they were uniquely liquid, safe, and universally accepted as collateral. However, the Treasury premium has now essentially vanished.
By the researchers’ calculations, long-term US government bonds have been offering higher yields relative to comparable foreign bonds since 2008. Even more striking, this shift has spread to short-term maturities for the first time in recent years. The premium on Treasury bills, the short-term IOUs issued by the US government, held up for more time than longer-dated bonds, but they too have also vanished since 2023 when the Treasury department issued more short-term bills.
“Treasuries have lost ‘specialness’ in the international comparison, in the sense that bond investors need to be incentivized with extra return for holding the actual Treasury,” says Du, the Sylvan C. Coleman Professor of Financial Management.
The dollar is still special
The good news for the United States is that the dollar's privileged status remains firmly intact. Since the 2008 global financial crisis, foreign investors and institutions have consistently had to pay a premium to access dollar funding directly, and that funding gap has actually grown in recent years.
This makes intuitive sense. The dollar continues to dominate global trade, international debt markets, and foreign exchange transactions. Foreign banks and companies need dollars to do business, regardless of how they feel about US government bonds.
Tighter banking regulations introduced after 2008 made it more costly for large global banks to supply dollar funding to the rest of the world. These policies raised the premium foreigners must pay to access US dollars directly. And when times get tough, that premium rises further still, as everyone scrambles for dollar funding at once.
A marked change with global significance
The US government faces a critical trade-off: The more debt it issues, the more it erodes Treasuries’ “privilege.” In turn, investors might expect higher yields for holding a riskier security, and costs could rise for the US government when it needs to borrow.
“Despite the dollar being special, there is something not so desirable about Treasury securities that now the Department of Treasury actually has to issue at a higher yield on the currency risk hedged basis compared to its G-10 currency pairs,” Du says. “If you flood the market with this instrument, it has lost its specialness, and the price does reflect that.”
Photo credit: AdobeStock/christianthiel.net
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Decoupling Dollar and Treasury Privilege
Du, Wenxin, Ritt Keerati, and Jesse Schreger. "Decoupling Dollar and Treasury Privilege." International Finance Discussion Papers, No. 1427, December 2025.
