Bond traders faced a conundrum on Tuesday. The world suddenly looked more scary than usual, with Turkey shooting down a Russian fighter jet near the border with Syria, another hostage situation in a French town and weaker-than-expected confidence in the U.S. economy.
But there were scant places to lie low.
The traditional move would have been to plow into classic haven assets, such as short-term U.S. and German government debt. That trade, however, is becoming increasingly treacherous as the Federal Reserve appears closer to raising overnight interest rates and German yields plunge to lows that defy common sense. (Even greater negative yields, anyone? Anyone?)
And sure enough, while investors initially bought 2-year U.S. Treasuries, they quickly sold them again, causing yields to bounce around and end the day near their May 2010 high. While German 2-year bond yields fell below negative 0.4 percent at one point, they soon rebounded to a whopping negative 0.38 percent.
This just demonstrates how hard it is to find safety. While developed-market sovereign debt has historically offered escape from losses in times of stress, this time is different. Yields are still near historic lows, leaving little room to fall further and a lot of room to rise, especially as the U.S. economy manages to avoid an imminent recession. (Of course, Wall Street analysts have been threatening investors with surging yields for years and that hasn’t happened.) Classic havens just aren’t offering protection the way they used to, and they may even end up being more expensive in the short run than they’re worth.
All this has left the market muddled and traders confused about how markets will react to news and what assets will shelter them from the turbulence. While the S&P 500 has gained more than 3 percent this year with dividends reinvested, U.S. government debt has also eked out gains, of 0.9 percent, even though the Fed is poised to raise rates as soon as December. But since the end of October, the equities have gained 0.7 percent while U.S. debt has lost value and German debt has barely eked out gains.
Traders are missing a safe place just when they need it the most. They may need to hide under the proverbial mattress. The one where they finally decide to put their money.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Lisa Abramowicz in New York at firstname.lastname@example.org
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