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 (JNK) in favor of safer bond funds with similar average maturity data such as iShares 7- (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%.
On the other hand, this downplays the notion that risk aversion has been gaining momentum. For instance, nearly every component of the FTSE Custom Multi-Asset Stock Hedge Index has gained ground since the Federal Reserve ended its QE3 program at the tail end of October, while U.S. stock assets have been relatively flat amid increasing intra-day volatility. What’s more, ETFScreen.com shows the relative strength factor (Rsf) for all ETFs as they change each week across a three-month span. This helps investors get a feel for potential momentum changes in the ETF universe.
|Risk Aversion Gains Momentum And Risk Taking Loses It|
|Risk (U.S. Stocks and High Yield Bond)||5-Nov||3-Feb|
|S&P 500 SPDR Trust (SPY)||83.5||73.0|
|iShares Russell 2000 (IWM)||65.5||62.3|
|SPDR High Yield Bond (JNK)||46.7||41.9|
|Multi-Asset Stock Hedge Components|
|PowerShares DB Dollar Bullish (UUP)||72.1||88.6|
|iShares 10-20 Year Treasury (TLH)||60.6||82.9|
|SPDR Gold Trust (GLD)||10.8||47.7|
In sum, there is little doubt that the appeal of traditional safer havens is on the rise. What may be worthy of debate is whether or not stock assets will find their footing. For what it is worth, I have not given up on them. I continue to favor those ETF assets that should benefit from deflationary global pressures, worldwide stimulus measures and a belief that the Federal Reserve will ultimately push off a token rate hike into Q4 of 2015.
Germany should benefit more for the European Central Bank’s QE than the rest of its euro-zone partners. It should also benefit more than the other members from the euro-dollar’s depreciation, as it is the largest exporter to countries outside of Europe. I am favoring iShares MSCI Currency Hedged Germany (HEWG). The gains have been substantial over a three-month period where mainstay U.S. benchmarks have floundered.
By the same token, as I have done for nearly fourteen months, I continue to add to long-duration treasury funds like TLH and EDV, particularly on pullbacks to the 50-day moving average. Whether it is risk aversion, relative value or limited supply, the only thing that will dampen my enthusiasm for treasuries would be remarkable evidence of a worldwide turnaround in growth. For now, however, global growth appears more likely to weaken further.