The Capital Flight to US Treasuries will ContinueAugust 7th, 2012 by Guest Contributor
By Julian Marchese of Marchese Financial
As global pressures continue to shock risk markets, U.S. investors find themselves allocating capital in the same place, the United States. Whether it be in U.S. treasuries, the dollar, or U.S. corporates, investors seem to have no choice. In today’s financial market environment, market participants are “allergic” to risk, especially with the market collapse we saw just 4 years ago. This has caused a flight from riskier geographic locations (Europe and Asia) to quality in stronger, developed countries (United States specifically). The chart below displays this phenomenon quite succinctly.
(Chart Courtesy of stockcharts.com)
The above chart displays the 10 year U.S. treasury note (blue line + area) plotted with 4 global equity markets. (U.S. equities [black], German equities [red], Chinese equities [gold], and Italian equities [purple]). You will clearly notice how capital has been consistently flowing out of global equities and into the United States, through treasuries and even riskier assets such as American stocks in some respects. I would argue that this will continue to be the case going forward for a multitude of reasons.
The first major reason is backing from the Federal Reserve. It has obviously been one of the main focuses of the Fed, to lower long term rates by purchasing longer term treasuries. Another reason has been highlighted above, which is that investors are reluctant to risk, and so one of only options investors have to eliminate most risk, is to allocate into U.S. bonds. Retail investors that have become sick and tired of the fluctuation of stocks in the past decade have also supported treasuries. Lastly, global economic pressures remain high, thus providing support to the bond market due to a flight to quality mentality.
As long as the underlying global market theme/environment does not change drastically in the near-term, we will continue to see a flight to quality in the bond market. A simple way to take advantage of this opportunity would be to purchase an ETF proxy for U.S. treasuries, such as the iShares Barclays 20+ Year Treasury Bond (TLT) or iShares Barclays 7-10 Year Treasury Note (IEF).
About Julian Marchese
Julian Marchese is a 16-year-old active Global Macro Trader that trades in stock, options, futures, foreign exchange, and various OTC markets. He has been trading since he was 11 years old, and has been interested in the markets from the age of 8. He has appeared on national television in Canada, on the hit TV show Dragon’s Den and has been written about in the Toronto Star, Toronto Life, and Globe And Mail. Julian’s main goal in the financial industry is to become a global macro hedge fund manager while helping and educating others along the way. Visit his blog at MarcheseFinancial.com. Follow Julian on Twitter @JulianMarchese.