Nowhere To Hide? Consider “Semi-Safe” Havens (Part 4 of 7)
3.) US Treasuries:
At today’s levels, Treasuries offer little better than cash in the way of yield and record-low coupons mean that duration risk is also at a record high. Currently, even a small back up in Treasury yields would lead to significant losses.
Market Realist – US Treasuries provide safety, but they’re demanding a huge premium right now.
The graph above shows ten-year Treasury (IEF) yields. Yields have been driven down over the years by the Fed’s bond buying program, which included aggressive purchases of long-dated Treasuries and MBS (mortgage-backed securities). More recently, though, fears of a global slowdown and political uncertainty in Greece have led investors to safer assets, including US Treasuries (TLT) and gold (GLD)(IAU).
The ten-year Treasury is now yielding below 2%. On January 22, it was yielding 1.9%. This is only slightly above the inflation rate, which came in at 0.8% for December. The real yield you’re getting after subtracting inflation is 1.1%.
Unlike gold, though, Treasuries are less volatile (VXX). Like gold, Treasuries also have a low correlation with risky assets.
International Treasury yields are also seeing a similar phenomenon. German five-year Treasuries recently touched negative territory, which was unprecedented. The Japanese ten-year has been hovering below the 1% mark. With most developed markets seeing low bond yields, investors are now searching for yield.
In other words, you’re having to pay a premium to own the safety provided by Treasuries. Gold, on the other hand, has been beaten down over the last few years. However, it’s difficult to value gold and gauge whether it’s undervalued or overvalued.
Read on to the next part of this series to find some semi-safe havens that aren’t as safe as the assets we discussed above but that certainly provide higher yields.
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