Are We at Risk of Returning to Risk-Off?

03/26/2012 4:45 pm EST


Jim Jubak

Founder and Editor,

The period of fear selling that affected markets so dramatically last year could soon come back, if this crucial bond sale goes badly, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

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 March 16, in the aftermath of the Fed’s slightly more positive take on the US economy, Treasury yields fell this past week, as investors looking for safety bid up prices. (Yields fall on Treasuries as prices rise.)

Yields on ten-year US 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 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 periods 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 US 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.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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