Treasury selloff a symptom of lost US confidence, Yellen says

Former Treasury Secretary Janet Yellen said that the recent selloff in Treasuries signaled a worrying drop in confidence in American policymaking, rather than a dysfunctional event that warrants Federal Reserve intervention.

“I don’t think we’re seeing dysfunction — in the sense of liquidity completely drying up in the markets — but a pattern suggestive of a loss of confidence in US economic policy,” Yellen said on CNBC Monday. The pattern “is really very worrisome,” she said.

Yellen, who left office in January, shared the observation made by many market participants that the simultaneous rise in Treasury yields and decline in the dollar last week was unusual. She said that dynamic suggests “that investors are beginning to shun dollar based assets” and “calling into question the safety of what is the bedrock of the global financial system, namely, US Treasuries.”

If risks to financial stability did arise, Yellen, who’s also a former Fed chair, said the US central bank would have the capacity to step in, as it did with liquidity facilities in March 2020 during the initial Covid crisis.

“Let me be clear, I do not yet see those in play, and hope they don’t come into play,” she said of stability risks.

Yellen also said she was pleased the 10-year and 30-year Treasury auctions last week “went well.”

The former Treasury chief didn’t expect China to sell its holdings of Treasuries. The nation has the second-largest foreign stockpile of US government debt.

“China, if they were to sell dollars, would be pushing up the value of their own currency and creating risks to the Treasury market and to global financial stability that would harm them — and would represent a very significant escalation,” she said. “So it’s not something that I would expect China to do.”

The risk of a recession has gone “way up,” Yellen also said, but “I wouldn’t want to go so far as to forecast” one now, she said.

The Fed, meantime, will need to be monitoring inflation expectations amid the Trump administration’s tariff hikes. The central bank “I think will be reluctant to cut rates.” 

“The tariff policies, and the uncertainty they’re creating, create the most difficult possible situation for the Fed,” she said.