Flight to Volatility Is What You Get in Flight-to-Safety Trades

Investors are piling into U.S. government bonds looking for safety. What they’re getting are securities whose values are fluctuating more than those on junk bonds.

Yields on Treasuries have swung twice as much as those on the lowest-rated debt this month as the Swiss National Bank and Bank of Canada surprised markets. Last week, a measure of volatility in the government notes surged to the highest since Oct. 15, even as yields on speculative-grade bonds barely budged, remaining within a 0.04 percentage point range.

The moves around the European Central Bank’s announcement today of a new 1.1 trillion euros ($1.3 trillion) asset-purchase program only drive home that safe-haven debt is increasingly an epicenter of unpredictability. Yields on benchmark U.S. 10-year Treasuries went up to 1.95 percent then down to 1.81 percent and are around 1.88 percent as of 11:26 a.m. in New York.

With the ECB poised to become the dominant buyer of debt in the region, “if that very large investor decides to change their tack, those who are left are much more vulnerable,” said John Briggs, head of cross asset strategy at Royal Bank of Scotland Group Plc. There’s the potential with bonds “at these compressed yields for central-bank moves that could shake the foundation of” investors’ beliefs.

ECB Stimulus

This means it’s getting harder and harder to find a good place to hide from turmoil at a time when the global economy looks increasingly uncertain.

The ECB’s announcement that it will buy 60 billion euros of assets every month to fight deflation means investors will have to choose between piling in to riskier assets or earning even less for owning debt of nations with the strongest economies.

Bondholders are already paying for the privilege of holding about 1.4 trillion euros of sovereign debt in Europe. The amount of such negative yielding debt has about tripled since October, according to Bank of America Corp. data.

While investors haven’t liked junk bonds much of late given the market’s exposure to tumbling oil, the securities have been much more stable in 2015. U.S. speculative-grade notes yield 6.99 percent, versus 6.95 percent at year-end. Meanwhile, 10-year Treasury rates are down 0.3 percentage point from 2.17 percent on Dec. 31. And yields on 10-year German bunds have fallen more than 17 percent this year to 0.45 percent.

Some of it has to do with bond math. There are two components of corporate-bond yields that can offset one another: benchmark rates and and risk premiums.

Risk is a funny concept in bonds.

There’s the chance you don’t get your money back, and then there are the odds a central banker sneezes and traders go wild.

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