When risk and uncertainty abound, investors move to government bonds in a “flight to safety”
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War and other forms of international conflict produce a great deal of fear and uncertainty, which makes for volatile markets. And when investors are afraid and uncertain, they tend to move out of stocks and into government bonds. Since Russia invaded Ukraine, this has been happening more and more. So what does this “flight to safety” say about the economy?
Investors can handle some measure of volatility and risk, but when there’s deep uncertainty about the direction of the economy, more of them seek the predictability of the Treasury market. It’s essentially an instinct.
“Every time there is any form of risk, like we see a dinosaur approaching the cave, we store our goods in the safest place that we have,” said Paolo Pasquariello, professor of finance at the University of Michigan.
Right now the dinosaur is the war in Ukraine, and that safe haven is the U.S. bond market. Investors are parking their money there, waiting for better times to own riskier assets.
How the war in Ukraine will unfold, how long it will last and what its overall impact will be are still unknown. That’s what investors are reacting to, according to Winnie Cisar, global head of strategy for CreditSights.
“We have a highly inflationary event, especially with commodity prices and energy prices,” she said, which could cause consumers to change their habits. Saving more and spending less could lead to a deceleration in growth.
Cisar said investors are switching gears, from taking risks in hopes of increasing the value of their investments to guarding against losses. So what makes U.S. Treasury bonds a safer bet?
“The U.S is not going to default on its debt, and it is a global market. So, anywhere anyone has concerns about equity markets or the economy, the U.S. Treasury market is the destination to go,” said Lawrence Gillum, a fixed-income strategist with LPL Financial.
Gillum said another reason investors flock to bonds is their liquidity. It’s fairly easy to get your money out when the tides change.
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