The panic in global financial markets has sparked an unprecedented rush into safe US Treasury securities, driving yields on short-term government notes down to almost zero.
Due to stampeding demand for safe short-term investments, the US Treasury’s four-week and three-month bills on Friday yielded an effective rate of 0.01 percent — down sharply from 1.515 percent and 1.785 percent, respectively, in early September.
Other Treasuries are also showing record low yields. The 10-year bond yield fell as low as 2.505 percent and the 30-year bond yield slid to 3.005 percent at one point on Friday. The six-month bond yielded a mere 0.20 percent.
The low yields reflect a surge in demand for these instruments, seen as the safest in the world during times of turmoil.
“Investors seem to be content to sell stocks and park into the bonds for now,” said Greg Michalowski of the financial website FXDD.
I’ve been seeing this for a few months. Almost all new money going into bonds has been earmarked for Treasuries & T-bills by the clients, and a fair number have been talking about liquidating their stocks to by Treasuries. The main brake has been reluctance to lock in losses by selling at the bottom.
I would not touch American bonds right now with someone else’s 10 foot pole unless they were short term or inflation protected. The dollar’s strength is illusory. We are heading for a brutal round of inflation in the coming years. Bonds are gong to get murdered.
Much of what I’m seeing is T-Bills, short term stuff used in lieu of commercial paper for semi-liquid purposes. One reason we’re suggesting people buy equities is there’s at least a chance the inflation won’t eat you alive.
Andrew,
That’s very sound advice. I am not against bonds. Any well balanced and diversified portfolio should have some. But a well balanced and diversified portfolio will also have other asset classes in sufficient proportion to limit downside exposure in any economic weather.
That said I think bond exposure should also be diversified. Having a quarter or so of your bond holdings in foreign securities makes an excellent hedge against potential inflation. Likewise any diversified portfolio should have at least 10% in metals, another inflation resistant investment.
Though I would not recommend putting all or most of one’s money in it unless you are nearing retirement, I like PRPFX as a good all weather conservative allocation fund. Its radical diversification provides excellent downside protection while producing a return that even in slow years generally beats Treasuries. It’s been one of the best in its class for the last nine years and is currently beating the S&P;by more than 20 points.
After a fairly cursory glance, that looks like a good fund. We do something similar, but do the asset allocation ourselves, ten to twenty funds depending on what the client wants. I’m mostly an equity guy, so a subset of my clients use us for equity (stocks mostly) and someone else for bonds. We’re running about a quarter to a third of our bonds in non-dollar assets, though we’ve got domestic up to 90% and higher in equities since to a large measure we’ve taken our lumps and the other developed economies are starting their slide. The MSCI EAFE index (industry standard for Europe, Australia and Far East developed economies) is down about half again as much as the S&P;500 and Russell 1000 (US Large Cap indices) for the three months ended 10/31 and for 2008 through 10/31. I don’t have 11/30 results to hand yet. It will turn, but for the moment if you are going to buy the stock of large companies, the US is the place to buy.
[i] I would not touch American bonds right now with someone else’s 10 foot pole unless they were short term or inflation protected. [/i]
[i] Much of what I’m seeing is T-Bills, short term stuff used in lieu of commercial paper for semi-liquid purposes. [/i]
I suspect corporations and institutional investors, not antsy individual investors, are driving the influx into Treasury securities. Risk-averse individual investors can find refuge in FDIC-insured banks, with $250,000 in insurance per bank. And if they don’t trust the government’s guarantee of deposits, why would they would trust the Treasury?
But for institutional investors and large corporations, $250,000 is a drop in the bucket. In ordinary times these investors might opt for money market instruments. In ordinarily troubled times they might opt for certificates of deposit. But in these times they view those options as insufficiently safe.
Any thoughts?
Somewhat. I’m seeing the most movement in my smaller accounts, in the $250,000 to $1 million range. A few of the bigger accounts are moving more towards Treasuries as corporates mature, but for the most part they trust our bond guys. We’re turning in pretty good numbers and the big boys are content to let us pick the wheat from the chaff of corporates. Several are mulling over switching from money market funds for their “cash” portion to T-bills, but haven’t yet pulled the trigger. I get the feeling they’re less worried about defaults than low returns and trust our due diligence.
I meant to add before my friend came to pick me up for dinner, that I’m looking at this primarily from the perspective of foundations that are in this for the long haul, with time horizons measured in decades. So they are content to suffer short term losses if they can hold on to the asset and recoup later on. So there is a lot of hunkering down and waiting, not much selling. New money is being directed into gov’t bonds and gold-plated corporates, but there isn’t a lot of that, and much is being put into short-term instruments to meet liquidity needs so that the damaged assets can be left alone till they’re more marketable. The general mood is that things will, eventually, get better and they’ll need a higher return than the Treasuries can provide in the long term.