The case for investing in riskier assets has often been described as a sensible quest for yield and/or capital appreciation in a world with ultra-low interest rates. That helps to explain why the S&P 500 has defied the odds with respect to corrective activity, garnering double-digit percentage gains in 2012, 2013 and 2014.
Yet the preference for risk averse treasuries over higher-yielding debt since July of last year puts a dent in the notion that speculation is still in vogue; rather, investors have been balking at funds like SPDR High Yield Bond (JNK) in favor of safer bond funds with similar average maturity data such as iShares 7-10 Year Treasury (IEF). Note the indisputable shift towards safety that the JNK:IEF price ratio depicts.
Of course, there are other ways to interpret widening credit spreads between high yield and U.S. sovereign debt. Struggling oil companies may represent as much as 20 percentage points of junk bond proxies. And, since one cannot sell a fraction of an ETF, investors may feel forced to liquidate baskets in their entirety. There’s some truth in that. What’s more, there is truth in the notion that the popularity of longer-maturity Treasury ETFs — iShares 7-10 Year (IEF), iShares 10-20 Year (TLH), Vanguard Extended Duration (EDV), PIMCO 25+ Year Zero Coupon (ZROZ) — is a function of relative value; indeed, foreign money may prefer 1.7% from a 10-year U.S. treasury to a 10-year German bund yielding 0.3%.