Where have all the safe havens gone?

With equities slumping, exchange-rate volatility increasing, and political risks intensifying, financial markets around the world have hit a rough patch. During times like these, international investors generally grow cautious and prioritize safety over returns, so money flees to “safe havens” that can provide secure, liquid investment-grade assets on a sufficiently large scale. But there are no obvious safe havens today. For the first time in living memory, investors lack a quiet port where they can find shelter from the storm.

Historically, the safe haven par excellence was the United States, in the form of Treasury bonds backed by the “full faith and credit” of the US government. As one investment strategist put it back in 2012, “When people are worried, all road lead to Treasuries.”

The bursting of the US real-estate bubble in 2007 offers a case in point. No one doubted that the US was the epicenter of the global financial crisis. But rather than flee the US, capital actually flooded into it. In the last three months of 2008, net purchases of US assets reached a half-trillion dollars – three times more than that of the preceding nine months combined.

To be sure, some of these dollar claims were due to the fact that foreign banks and institutional investors needed greenbacks to cover their funding needs after interbank and other wholesale short-term markets seized up. But that was hardly the only reason why portfolio managers piled into the US. Much of the increased demand was due to sheer fear. At a time when nobody knew how bad things might get, the US was widely seen as the safest bet.

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