Government bonds, long seen as the safest of safe-haven assets, are increasingly being branded as a bubble in some sectors. What are the alternative, lower-risk assets that could be profitable for investors?
Government bonds issued by developed nations such as Germany, Japan and, most prominently, the US, have long been considered “risk-free” by investors. This is because of the widely held view that it’s pretty unlikely that such nations could default on their debts. Bonds’ popularity among investors over the past several years has led to fears that a pricing bubble has formed amid low and negative interest rates in this traditional safe haven.
Since the 2008 financial crisis, investors’ bond purchases have become increasingly popular, particularly with large financial institutions that are looking for security and must comply with risk regulations. Governments, such as China’s, also own large amounts of US debt. At the end of 2018, fears that the bull market in equities could be coming to an end further boosted demand for government bonds and other safe-haven assets.
The higher demand for sovereign debt and low-interest rate environment have led the value of existing bonds to soar. As a result, fears that government bonds could be a bubble about to burst have not gone away. So, where should safe-haven investors look now?
Is there a bubble?
There is still a split in opinion among market commentators on whether government bonds are in a bubble and what the likelihood is that they could suddenly burst. In August John Authers, writing in Bloomberg, noted that while bonds meet four popular criteria for defining a bubble there is “no catalyst to burst it”.
One thing that’s not in doubt though is that since reaching three-year highs in October 2018, US Treasury yields have fallen considerably. From that time to 6 January of this year, the US 10-year Treasury yield fell from 3.23% to 1.80%, the 30-year yield from 3.46% to 2.30%, and the two-year yield fell from 2.9% to 1.57%
Decline of the US 10-year treasury yield since October 2018
At the same time, stocks continue to make solid gains, which raises questions about how effective bonds can be as a major proportion of an investment portfolio. With the lack of returns, coupled with the risk of a market bubble, here are some alternative, lower-risk investments for traders and investors to consider.
The mother of all safe-haven assets, gold, looks incredibly expensive and faces technical resistance to moving higher after support broke in 2013. But silver – despite facing many of the same challenges – increasingly appears to offer better value. Although both metals are not bringing in technical level gains, they continue to show their quality as a lower-risk asset, making modest gains over the past year.
The Swiss franc
Reverting to cold hard cash such as the US dollar, euro, British pound or Australian dollar is another default safe haven move for most traders and investors. But with Brexit, climate-fuelled bushfires in Australia and geopolitical tensions in the Middle East, wider exposure to these go-to currencies might not be ideal. Enter the Swiss franc. With Switzerland’s policy of neutrality, a tepid climate and solid economy, the Swiss franc has increasingly been looking like the safest FX option. Indeed, the currency made gains against both US dollar and the euro the day that news broke that a US drone attack had killed Iranian general Qasem Soleimani.
With Apple’s [AAPL] share price having gained by 92% in 2019 and growth continuing at the start of this year (up by 5.3% as of 17 January), some analysts have argued that Apple could be set for either stagnation or even a drop. But the biggest company in the world based on market capitalisation has shown remarkable resilience throughout its history.
Rise of Apple's share price in 2019
Bitcoin’s price had bigger gains than oil following the Soleimani incident, climbing by around 5% on the day the drone strike took place. It was up by 17% between 3 and 10 January. In May 2019, as stocks fell in reaction to developments in the US-China trade war, Bitcoin gained, climbing by as much as 15% on 13 May – the same day that the Dow Jones Industrial Average fell by as much as 696 points. Such examples could suggest that investors and traders are beginning to use the cryptocurrency as a safe haven hedge. But it’s worth noting that Bitcoin is still far, far more volatile than gold and has swung wildly over the past three years.
Rise of Bitcoin's price on 13 May 2019