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Why Global Flight to Safety Favors US Treasuries

Eurozone Sovereign Yields below Zero – US Treasuries Back in Vogue (Part 2 of 3)

(Continued from Part 1)

Treasury yields up as economic indicators signal slowdown

The long end of the US Treasury (TLT) yield curve is up since the beginning of the month. Economic indicators and the Fed’s minutes have been indicating a slowing US economy. The benchmark ten-year Treasuries (IEF) currently yield 1.94% as of April 13—up 3.7% since April 1. The five-year Treasuries gained 4.5% in yield—quoting 1.38% on April 13.

The bond market (AGG) (BND) has been volatile over the past month. Economic data—like a weak jobs report earlier this month and the Fed’s FOMC (Federal Open Market Committee) minutes where the Fed officials were divided on the liftoff decision—have indicated a slowing US economy. Read Diverging Policymaker Views Move Treasuries in April for deeper insight into the topic.

Global Flight to Safety Favors US Treasuries

However, from a macro perspective, the global gloom is a blessing in disguise for these safe-haven securities. The strengthening dollar may be hurting US multinationals’ overseas earnings—like General Electric (GE), JPMorgan Chase (JPM), and Qualcomm (QCOM) and US exports in general. However, a stronger dollar is good news for safe-bet US government bonds. They become even more attractive in the face of world economic malaise and currency wars.

Purchasing US Treasuries with foreign currencies has become popular. Investors in government bonds primarily seek minimum default risk and high liquidity. Currently, US Treasuries offer both—and with more conviction than any foreign governments’ bonds.

US Treasury debt in euros returned 36.7% over the past year

According to a Barclays Plc study, as reported by the Wall Street Journal, investors that have been buying US Treasury debt in euros earned a total return of 36.7% over the past year—including price gains along with interest payments. The investment would have earned 4.7% if it was invested in dollar terms. A similar investment would have bagged 23.9% in Japanese yen, 19.8% in British pounds, and 16.9% in Swiss francs.

Interestingly, the US equity market, as measured by the S&P 500 Index, delivered close to an 18% return in dollar terms for the past year ending April 10. According to Barclays, the figures reflect the gains that would have been earned by someone swapping out of foreign currencies and into dollars to buy US debt a year ago, and then returning the funds to the original currency today—reported the Wall Street Journal.

While US Treasuries receive favor from international investors, government bond yields in the Eurozone seem to be getting comfortable with negative yields. Let’s take a look.

Continue to Part 3

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