Watch Treasury yields to see if we're headed back to days of "risk-off" trades

03/26/2012 2:43 pm EST


Jim Jubak

Founder and Editor,

Are we headed back to the days of ‘risk off’?

It certainly looked like it last week with the market worried about slowing growth in Europe and about a hard landing in China.

The most striking indicator to me was the reversal in the Treasury market. After climbing for the week that ended on Friday, March 16, in the aftermath of the Fed’s slightly more positive take on the U.S. economy, Treasury yields fell this past week as investors looking for safety bid up prices. (Yields fall on Treasuries as prices rise.)

Yields on the 10-year U.S. Treasury notes fell the most since January, dropping from last week’s five-month highs. Yields fell 0.06 percentage points to 2.23% for the week that ended on March 23. That almost exactly wiped out the increase in yields of 0.27 percentage points in the week that ended on March 16.

The risk-off trade that alternated with period of risk-on trading in 2011 is characterized by flight to dollar and yen denominated assets, selling of emerging market currencies, bonds, and equities, and relative outperformance by “safe” markets such as the United States against “risky” markets such as China or Brazil.

Of course, the shift from risk-on to risk-off takes a bite out of all markets as investors in “safe” markets sell the riskier assets in those markets.

The strength of the “risk-off trend” will get a test in the upcoming week when the U.S. Treasury is scheduled to auction $99 billion in two-year to seven-year maturities.

If yields still drop even in the face of that jump in supply, it means that investors are looking for safety again and are willing to pay a big premium for it in the Treasury market. If that’s the case then I’d say risk-off is likely to last for a while.
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