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‘Safe’ assets left investors sorry in 2013

Friday, January 3, 2014

NEW YORK—Being safe left some investors sorry in 2013. That’s because some financial assets that are considered safe lost money. Here’s a look at how some of the supposedly safe assets have performed.



Treasurys and other bonds
From 1981 through 2012, demand for Treasurys rose and their yields, which move in the opposite direction, fell. The yield on the ten-year Treasury note bottomed at a record low of 1.39 per cent in July of 2012, when the European debt crisis intensified and people rushed to buy US government debt securities.


In the 1980s, investors bought Treasurys as inflation eased and interest rates fell. That made higher-yielding Treasurys already in the market more attractive. Investors also bought Treasurys during the financial crisis in 2007. Treasurys are considered among the safest financial assets because they are backed by the US government, which, at least in theory, should always be able to repay its debts.


Bonds also rose as the Fed began purchasing Treasurys in response to the financial crisis and the recession to keep interest rates low to boost the economy. The central bank has been purchasing US$85 billion worth of Treasurys and mortgage-backed securities each month.


The US economy now appears to be gaining steam and the Fed, the biggest buyer of Treasurys, plans to start reducing its purchases in January. The yield on the ten-year Treasury note climbed from 1.76 per cent to as high as 3.04 per cent in 2013 as investors sold bonds in anticipation of the Fed’s pullback.


The rise in yields and the corresponding decline in bond prices has meant losses for bond investors, prompting them to cut their holdings. Investors pulled an estimated US$32 billion out of Treasury securities in the first three quarters of 2013, putting Treasury funds on track for the first year of net outflows since 2003, according to Lipper fund flow data. The Lipper US index for Treasurys, which measures the performance of government debt, has lost 9.1 per cent since the start of 2013.


Other bonds, which are priced in relation to Treasury debt, also had a bad year. Municipal bonds, issued by states and cities, fell 2.6 per cent, according to Barclays indexes. High-quality company bonds also edged lower.



Gold had its worst slump in more than 30 years. The price of gold rose every year from 2001 to 2012 as investors looked for an alternative to the US dollar and protection against inflation. Gold went as high as US$1,900 an ounce in August 2011 as lawmakers argued over raising the US debt ceiling and threatened to push the nation into default.


In 2013, gold started to slump as inflation didn’t materialise, investors shrugged off the gridlock in Washington and the US economy recovered. In April, it plunged nine per cent in one day. Reports that the Mediterranean island nation of Cyprus could sell some of its gold reserves to pay off its debts after a bailout by the European Union also rattled the market. At its current price of US$1,202 an ounce, gold has lost 28 per cent of its value this year, the worst drop since 1981, when it slumped 33 per cent.



Investors moved into cash as the stock market collapsed in 2008. Unfortunately, many have stayed there, even as savings rates stagnate while the Fed keeps its benchmark short-term borrowing rate close to zero. That means that inflation is eroding the value of the money. “That’s obviously a big problem,” says Chris Haverland, an asset allocation strategist for Wells Fargo Private Bank.


In the 12 months through November, consumer prices have risen 1.2 per cent, more than the best rates currently offered on savings and money market accounts or CDs. Even if long-term bond rates rise when the Fed starts easing back on its stimulus, the short-term rates off which most saving accounts are based are going to stay close to zero for at least another year, says Haverland. Cash may still be the safest option for investors, but investors may also be missing out on better opportunities elsewhere.


Investors who stayed with stocks from October 2007, before the market crash, to September 2013, would have had a cumulative return, including dividends, of 21 per cent. Haverland estimates that the return on cash over the same period was 3.6 per cent.





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