Are US Treasurys still a safe-haven asset? An epic bond-market crash and rising default fears are sowing doubts.

Moody's lowered the US credit outlook to "negative" on Friday, signaling that a downgrade is possible in the future.

• US Treasurys have long been the go-to asset when uncertainty, fear, and panic send investors looking for safety.
• But that reputation has take major hits lately amid a historic bond sell-off and rising default fears.
• Financial markets have been engaged in a growing debate over the risks that lurk in Treasurys, with prominent voices raising doubts. 

US Treasurys have long been the go-to asset when uncertainty, fear, and full-blown panic send investors looking for safety — but that reputation has take major hits lately.

Financial markets have been engaged in a growing debate over the risks that lurk in Treasurys, with prominent voices raising doubts. On Friday, Moody's lowered the US credit outlook to "negative," signaling that a downgrade is possible in the future.

That comes as massive deficits have sent debt soaring, while the historic sell-off in US bonds, triggered by the Federal Reserve's rate hikes, has highlighted that prices are vulnerable too.  

"You have people talking about bitcoin, about equity being the 'safe asset' because they've lost confidence in government bonds being the safe assets because of the nature of this interest-rate risk," economist Mohamed El-Erian told CNBC last month.

Meanwhile, Principal Asset's Seema Shah told CNBC in a separate interview last month that "there's so many different forces which are buffeting the bond space that it's difficult to really say with great conviction that today Treasurys are your safe haven."

In June, a Dallas Federal Reserve paper said buyers view short-duration T-bills as the true safe haven, pointing out that net inflows in long-dated Treasurys fell during the 2008 crash and COVID pandemic.

"Long-term Treasury bonds may have no default risk, but they have liquidity risk and interest rate risk — when selling the bond prior to maturity, the sales price is sometimes uncertain, especially in times of financial market stress," it said.

But default has emerged has another risk as well.

In March, a Richard Bernstein Advisors note said spreads on credit default swaps have climbed for Treasurys since since 2011, when the federal government was issued its first credit downgrade. This means that markets are paying more to insure against what was once unthinkable.

Then came this spring's debt-ceiling drama and the US credit downgrade in August from Fitch, which cited the rising debt burden and political dysfunction.

Moody's flagged similar issues in its warning. If a downgrade follows, then US debt wouldn't be in the safest category for default risk at any of the three major ratings agencies. 

Alarms about US debt have been growing as federal deficits continue to widen. A Penn Wharton Budget Model recently determined that the US has roughly 20 years to change course on the size of its debt, or else a default of some form will be unavoidable.

As concerns over debt sustainability and bond prices mount, investors have turned more skittish too. Several auctions for long-dated Treasurys have seen weak demand, and buyers are demanding higher compensation for the risk of carrying Treasurys.

But TD Securities analyst Gennadiy Goldberg isn't convinced that Treasurys are slipping as a safe haven.

"Nobody worries about the long-term sustainability of the fire department when there's a fire, right?" he told Insider. "They call the fire department, and the fire department is US Treasurys."

In his view, investors have been willing to remain in riskier assets as growth in the US has remained robust. But if a risk-off environment hits markets and really takes off, then that's a very different ball game.

"And I would be shocked if there wasn't a safe-haven flight into Treasurys," he added.