Skip to main content

The coronavirus outbreak has investors moving money into so-called haven assets—those thought to be safe in a global economic downturn

The coronavirus outbreak has set in motion a massive re-allocation of capital, as investors move money into so-called haven assets -- those thought to be safe in a global economic downturn. That’s brought turmoil in stock markets, record low borrowing costs for the U.S. government and higher prices for gold bracelets. It could also be creating new sets of risks. If enough worried investors pile into an asset class to drive its price high enough, and worst-case scenarios don’t come to pass, they may be locking in losses instead of avoiding them.

1. I know what a haven is. What’s a haven asset?

Merriam-Webster defines a haven as a “refuge” or “a place of safety.” In the financial markets, “haven asset” is applied to a range of assets, primarily those whose values are expected to rise when global market sentiment sours into a so-called “risk off” environment. They usually behave counter-cyclically, or tend to appreciate when the business cycle is in a downdraft. For debt securities, it’s those also deemed to have no -- or little -- credit risk, meaning you’re assured of repayment when the bond matures. Haven assets are also expected to be very liquid, meaning they can be bought or sold in big sizes with ease nearly anytime.

2. What are some examples?

Here are some of the haven assets getting the most attention:
  • U.S. Treasuries are the global safe-haven asset of choice, as nobody expects the U.S. to default on its debt obligations. America’s ballooning deficit over recent years has created an ample supply of about $16.7 trillion. The suddenly insatiable demand by worried investors for the securities has sent long-term Treasury yields to all-time lows. Germany’s government debt also falls into this camp, with investor demand driving yields on its bonds of all maturities below 0%.
  • Certain currencies. Among the more than $5 trillion in currencies traded each day, the U.S. dollar, Japanese yen and Swiss franc have tended to be favored havens (although not always, with the yen going a bit offsides lately). The International Monetary Fund has described currency havens as those from countries with relatively low interest rates and deep and liquid financial markets.
  • Gold has long been a haven asset. When the prospect of strong returns elsewhere diminishes -- again think “risk off” -- gold becomes more attractive as a way for investors to get returns as the world sours. That’s why investor Warren Buffett says gold buyers are motivated by their “belief that the ranks of the fearful will grow.” Some people even have hidden gold underground, viewing it as the safest way to store their wealth.
  • Within the world of stocks, avoided by many in a “risk off” period, some investors snap up lower-volatility shares and those of companies that produce goods that should remain in demand even if Armageddon arrives.
  • 3. Are there risks when everybody does this at the same time?

    Simple answer: yes! For starters, behind the rally in Treasuries lurks a potential disaster waiting to happen if any downturn gives way to a rapid rebound -- what’s known as a V-shaped recovery. That could send yields sharply higher and make prices tumble. That’s especially true because of the way so many investors have piled into long-term debt. The market’s growing duration -- a measure of how much prices will fall if yields rise -- is seen by some as a coiled spring ready to break. Some bond prices are also at their biggest gap from models of fair value in years, meaning that history suggests that the odds are greater that prices snap lower than that they keep rising. And quantitative strategists warn that low-volatility stocks have become very richly valued.

    4. What does this mean for people who aren’t traders?

    There’s good news and bad news for them. Those in the market to buy a house now may be able to set their sights higher as tumbling debt yields have sent mortgage rates lower, and millions of Americans are expected to lock in lower monthly house payments by refinancing. On the flip side, this might be a good month for ignoring brokerage statements, given that $3 trillion has been wiped off the value of U.S. stocks.

    The Reference Shelf



































Comments

Popular posts from this blog

How to renew your driving license online

One of the most important documents any motorist in transit is required to have worldwide is a driving license.  In Kenya, police stop hundreds of motorists every day and ask for the driving license. For motorists who haven’t carried their licenses, hefty fines are incurred and sometimes might end in court.  However, most motorists forget to check the expiry dates for the driving licenses. If it so happens that your license has expired, the police will still fine you. Renewing licenses was hectic in the past. Motorists would have to queue for long at the Kenya Revenue Authority (KRA) to either get their licenses or for renewal purposes.  The good news is; you can now renew your driving license from the comfort of your location as long as you can access the internet.  The National Transport and Safety Authority (NTSA) has made it easy for motorists to renew their licenses online, and the process will take you about 10 minutes.  Here’s how to ren...

Dozens killed after gunmen attack Kabul ceremony

The Taliban denied responsibility for the attack on the gathering marking the anniversary of the death of Abdul Ali Mazari, an ethnic Hazara leader who was killed by Taliban fighters in 1995 after being taken prisoner [Anadolu] The death toll in an attack on a Kabul ceremony  marking the anniversary of a slain minority leader has risen to  27, a ministry of health spokesman said on Friday. "Twenty-seven bodies and 29 wounded transported by ... ambulance so far," Wahidullah Mayar, the health ministry spokesman, told Reuters, adding that the number could increase. Gunmen attacked the ceremony in the Afghan capital where a top Afghan political leader, Abdullah Abdullah, was present but escaped unharmed. "The attack started with a boom, apparently a rocket landed in the area, Abdullah and some other politicians ... escaped the attack unhurt," Fraidoon Kwazoon, Abdullah's spokesman, was quoted as saying by Reuters news agency. President Ashraf Ghani cond...

How firms are stamping out fake goods with high tech labels

Every working hour, about 80,000 bottles of beer are processed through the East African Breweries Ltd (EABL)   production line at the Ruaraka factory. An almost equal number of cans is processed on a parallel line. However, not even one of the bottles or cans can leave the factory before it has been affixed with the Kenya Revenue Authority’s excise duty and the Kenya Bureau of Standard stamps. Each of the two security stamps tells a story; one says that the brewer has paid excise tax while the other assures consumers that the quality of the product has been tested and certified as fit for human consumption. One has an implication on public good while the other has direct import on public health and safety. These twin messages are at the very heart of every security stamp affixed on any product made or sold in Kenya. The stamps, just like the security marks affixed on identity cards, passports, title deeds and other important documents as well as products meant...