U.S. Treasury debt has long been considered a “risk free” asset. Gold bugs hold a different definition of risk free, but for most of Wall Street and the investing public the assumption has been that there’s zero chance the U.S. government will ever default on its debt.

The truth is finally dawning on this crowd. There is more than one way for the U.S. to default.

The government might not welch on payments, though the chances of that certainly aren’t zero. It can surreptitiously default through inflation. What’s more, the risk of that type of default is 100% – it is happening now and figures to get worse.

Investors traditionally turn to bonds when there is economic uncertainty. Most retirees have been coached to overweight bonds to reduce volatility and risk in their portfolios. The past couple years have delivered a wakeup call.

2022 was the worst year ever in the Treasury market. The 10-year yield jumped a full 2%. This year the carnage could be even worse as the bond bear market intensifies.

Banks and other financial institutions look at Treasuries as the ultimate collateral and as a Tier 1 reserve asset. But they, too, are getting a jolt of reality.

Small and mid-tier banks have been decimated by losses on the bonds held on their balance sheets.

The Federal Reserve implemented a backdoor bailout of those banks earlier this year.

Fed officials created their “Bank Term Funding Program” to allow member banks to borrow against underwater bonds at 100 cents on the dollar rather than book losses on their actual market value. It’s an alternative to the fire sale of those deeply underwater assets to raise liquidity.

The loans have a 1-year term and the program was intended as a short-term measure.

The Fed seems likely to renew the program indefinitely, or else the reckoning for banks will be biblical. Regardless of what happens, institutions have learned a lesson.

The question is what happens when banks and investors decide that Treasury debt is anything but “risk free.” The list of “go to” safe haven assets is small. If bonds no longer fit the bill and U.S. dollars are losing appeal for similar reasons, gold may be the last refuge.

Money Metals Exchange and its staff do not act as personal investment advisors for any specific individual. Nor do we advocate the purchase or sale of any regulated security listed on any exchange for any specific individual. Readers and customers should be aware that, although our track record is excellent, investment markets have inherent risks and there can be no guarantee of future profits. Likewise, our past performance does not assure the same future. You are responsible for your investment decisions, and they should be made in consultation with your own advisors. By purchasing through Money Metals, you understand our company not responsible for any losses caused by your investment decisions, nor do we have any claim to any market gains you may enjoy. This Website is provided “as is,” and Money Metals disclaims all warranties (express or implied) and any and all responsibility or liability for the accuracy, legality, reliability, or availability of any content on the Website.

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