What is a safe haven country these days?

Traditional safe haven countries are falling by the wayside - new ones are emerging

I’ve written a lot about the “debasement trade” in recent months, which is about a growing fear in markets that countries will inflate away unsustainable debt burdens. This trade was most seriously in focus a few months ago, when precious metals prices were going through the roof, a move that began after Chair Powell’s dovish speech at Jackson Hole on August 22 and thus had the whiff of debt monetization fears about it.

But the “debasement trade” is much broader than precious metals. It’s about any kind of safe harbor from debt monetization, which means low-debt countries are also possible destinations for safe haven flows. This post updates my “convenience yield” estimates, which I first rolled out over the summer. For the US, this calculation compares the 10-year Treasury yield to the trade-weighted yield on 10-year government bonds in other advanced economies after those are swapped back into US Dollars using FX forwards. This replicates work by the amazing Wenxin Du, with the difference that I’m using FX forwards as a shortcut, while she uses interest rate and cross-currency swaps.

If the US yield is below the trade-weighted US Dollar equivalent for the rest of the world, this is called a “convenience yield,” as markets forgo yield for the “convenience” of holding US Treasuries. If the US yield is higher than its equivalent abroad, this says Treasuries pay a risk premium and may be losing some of their safe haven appeal.

Today’s post flags two key developments. First, the US “convenience yield” has eroded steadily over the past decade, a move that predates the second Trump administration. But - surprisingly - it looks like the premium the US pays on 10-year Treasuries has shrunk in recent months, which I interpret as a sign that there’s many other fiscal trainwrecks out there, so markets think the US looks ok on a relative basis. Second, Sweden is emerging as the top safe haven destination, with a “convenience yield” that just fell below Switzerland. This may surprise some people, given that the Swedish Krona is considered very cyclical and volatile, but remember that these calculations are currency hedged. Markets are rewarding Sweden’s low debt level (a stunning 33 percent of GDP), which is even lower than Switzerland (38 percent of GDP).

The left chart above shows my convenience yield calculation for the US. It shows the difference between the US 10-year Treasury yield and the trade-weighted average of foreign yields after those are converted back into US Dollars using FX forwards. The chart shows the steady erosion of the US convenience yield, but it also shows that the premium the US pays on 10-year Treasuries has shrunk recently. US fiscal policy is a mess, but markets think it’s not nearly as bad as in some other places. The right chart shows this same calculation for yesterday across five more countries. My calculation in each case mirrors what I do for the US, so this is the difference in the 10-year yield versus the trade-weighted equivalent yield abroad after that’s been converted into the home currency using FX forwards. Sweden just surpassed Switzerland as having the lowest convenience yield. In their rush for safe havens, markets are rewarding any place with low government debt and Sweden has moved to the top of the list.