No financial asset has stood the test of time like U.S. Treasury bonds. They are known for providing investors with steady, low-risk returns, and yet in the last few weeks, something strange has happened: Everyone suddenly hates U.S. Treasury bonds!
“It’s a strange situation. U.S. Treasury bonds have long been deemed a safe haven in times of uncertainty… But now we’re seeing widespread pessimism.” – Mike Lepley, Financial Analyst
The sudden wave of pessimistic sentiment appears to have been triggered by a series of events. Last month, the U.S. Federal Reserve announced that it would be tapering its asset purchases, which sent investors into a state of panic. Then, the yield on the benchmark 10-year Treasury note shot up to its highest level in almost a year. This increased selling pressure on U.S. Treasury bonds as investors searched for higher returns.
The sudden disenchantment with U.S. Treasury bonds is likely to have far-reaching implications, particularly on stocks and other riskier asset classes.
Typically, when investors become risk-averse, they move their money into the safety of U.S. Treasuries. However, with yields on U.S. Treasuries steadily creeping higher, investors may be more inclined to put their money into stocks, real estate and other riskier asset classes. This could lead to an influx of capital into the stock market, and subsequently, further price appreciation.
Conversely, a surge of selling pressure could reduce the demand for U.S. Treasuries, and create a ripple effect throughout the financial markets. For instance, if U.S. Treasury yields increase significantly, borrowing costs on corporate debt may also go up. This could have a negative impact on businesses, and ultimately, lead to a deflationary spiral.
Missing the relative safety of U.S. Treasury bonds, investors would probably try to take refuge in other safe-haven assets. Gold, in particular, could be a beneficiary of the flight to quality. Gold prices have surged to record highs in recent weeks, with the metal breaching $2,000 per ounce.
Ultimately, it is too early to tell how the current situation will pan out. But it’s safe to say that the widespread dislike of U.S. Treasury bonds will have wide-ranging implications for the financial markets. So it pays to keep a close eye on the situation and adjust your investment strategy accordingly.