Where can investors find safety?
Traditionally, safety was found in the bond market. Treasury Notes and Bills offered the highest possible credit protection, and their short maturities protected against inflation. The more conservative investors wanted to be, the shorter the maturity they would choose.
But short doesn’t equal safe anymore. Inflation is running between one and two percent, based on what measure you use. And the Fed has kept short-term rates at zero for four-and-a-half years now. Through the magic of financial repression, the Fed has taken a 10% haircut off of these safe assets.
In addition, with Congress and the President playing political hot-potato with the debt-ceiling, the willingness of the United States to fully honor its debt obligations isn’t as sacrosanct as it used to be.
Safe assets aren’t safe if they’re overpriced. Finding safe investments is a dynamic process—and like any process, it’s subject to change.
Douglas R. Tengdin, CFA
Chief Investment Officer