1. Investors Seek Alternatives to Bond Havens - WSJ.com Page 1 of 1
Investors Hunt for Cheaper Havens
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By CYNTHIA LIN
NEW YORK—With the costs of hiding out in U.S. government bonds at their highest ever,
investors are on the hunt for other ways to protect their money.
After Friday's weak nonfarm-payrolls report, the immediate reaction was a stampede into
U.S. government bonds. Selling later took hold and brought prices back down a bit.
Gold, meanwhile, saw sustained gains, ending 3.7% higher at $1,620.50 a troy ounce.
Investors who have tolerated 2% yields on 10-year Treasurys are being tested now,
because a rate of less than 1.5% isn't enough to make up for expected inflation. In late-
afternoon trade Friday, the benchmark 10-year note was up 1 2/32 in price to yield
1.467%. Bond yields and prices move inversely.
With Europe's debt crisis back in high gear, the U.S. economic recovery stalling and
stocks plunging, investors have bid up bond prices. But the lower the yields go, the more
appealing other assets such as cash and gold become.
"I love cash right now," said Matthew Tuttle, chief investment officer at Tuttle Wealth
Management. "You don't earn anything, but it sure beats having your head handed to you
by stocks."
This isn't to say U.S. Treasurys or German government bonds aren't still the go-to havens
when nerves get rattled. Investors take comfort in the belief that the U.S. and German
governments will pay their lenders back in full. But the price of such comfort grows every
time more buyers scramble for safety.
The yield on two-year German debt dipped into negative territory briefly last week. That
meant that investors were willing to pay to lend the German government money.
It only gets worse when accounting for inflation. Based on yields in the Treasury Inflation
Protected Securities market, investors' expectation for annual inflation in the U.S. is
around 2.05%, which means that buying 10-year notes yielding 1.467% could leave
investors with an inflation-adjusted loss each year.
Cash under a mattress also suffers a loss from inflation. But holding bonds runs the
added risk of debt prices falling if the mood improves and interest rates rise. Brian Gilbert,
bond portfolio manager at Advisors Asset Management, calls it "rewardless risk," warning
that if 10-year Treasury yields reverse course and head back to their 2.37% mid-March
level, buyers would lose nearly 7% of their original investment.
Investors will digest a barrage of monetary-policy remarks this week, with the Bank of
England and European Central Bank each making policy decisions. Nine Federal Reserve
officials are also due to speak, including Fed Chairman Ben Bernanke on Thursday and
Vice Chairman Janet Yellen on Wednesday.
Suggestions of more cheap money could revive investor confidence to move out of
Treasurys and into riskier assets. Conversely, analysts say a lack of policy action could
spur another bout of buying in bonds, but one that might quickly reverse when investors
tire of paying so much for safety.
The recent "rally has very little to do with long-term investors," said Marc Ostwald,
strategist at Monument Securities. "They've long abandoned these government-bond
markets. Either be brave and stick it elsewhere, or stick it in cash."
http://online.wsj.com/article/SB10001424052702303552104577440980027585446.html?m... 6/6/2012
