Will US Treasuries Role Change Forever Amid Ukraine?

With the ongoing conflict between Russia and Ukraine, another asset has surprisingly become weaponized: the US Treasuries. As such, going forward some thought should be given about their role and their actual value.

Ukrainian War Waves Goodbye to Sovereign Immunity

If you are country or central bank which is holding US Treasuries or other government debt at a bank beyond your own borders, you now know that those may be seized by the United States or the European Union.

This means at least three things:

1. US Treasuries can no longer be seen as “neutral money”

2. Holding US Treasuries might be painful wrong idea as of now, a security risk even, especially for countries which might have (or potentially have) some sort of a run-in with the US.

3. Holding US Treasures results in a loss of purchasing power as one can easily tell that their yields are trading far below the rate of inflation (ex: 10-year is standing at 1.74% versus a 7.50% CPI).

China should take be taking notes with US treasuries in flux

China holds about a trillion US dollars’ worth of US treasuries and just saw what was previously considered to be a sacrosanct asset, the backbone of the global financial system being frozen, or, depending on interpretations, weaponized.

The rules of the game seem to have changed as freezing assets were previously limited to individuals (like oligarchs) but with these new developments, it might be safe to say that this puts in question the entirety of the US Dollar based global financial system given that the premise of Central Banks holding US Treasuries as a reserve asset is now questionable.

So, what places remain as neutral? Where should central banks store their reserve assets?

Well, physical gold comes immediately to mind but neutrality in its truest form can still be found in Bitcoin (in theory at least). However, an important point must be made: Bitcoin still seems to be correlated with the stock market, meaning that if we are in fact met with a liquidity crisis, Bitcoin might be just out of reach of being a completely safe haven asset and still see a tumble if the market crashes.

When the major global reserve can simply get “cancelled”, its fragility becomes fairly evident and financial contagion might even be a possibility as the global economic system finds itself extremely leveraged.

Accordingly, gold remains as the legacy asset and Bitcoin is prone to become more and more important as its demographic tailwinds begin to show.

Could this mean that a global monetary reset might be in the making?

While the FED is being hawkish, the conflict and its sanctions surely seem to have the potential to spread.

One cannot simply overlook how global markets have become incredibly interconnected. Moreover, high leverage seems to be a constant in each single one of them, so if institutions have holdings of Russian banks or Russian stocks, things might take a bad turn.

Going forward, one should certainly be prepared for some extreme volatility.

And as Russia will begin to sneeze, we surely hope the rest of the world doesn’t catch a cold.