Treasuries Benefit as Risk-Aversion Increases

Today was one of those abnormal days in the markets in that Treasuries rose along with the stock market. Usually, Treasuries benefit from weakness in stocks, so the rally in Treasuries today tells me investors are positioning themselves for selling pressure in stocks in the coming months. From Reuters, Treasuries stay course as riskier assets flag:

The haven of government bonds is recapturing some luster as it dawns on investors stocks cannot rally much more without a strong U.S. economic rebound.

After 2008′s humbling market meltdown, trigger-happy investors are ready to hunker down in bonds at the least sign of trouble, despite seemingly modest returns. Many do not see stock turbulence as temporary, and expect it to bolster Treasuries for months or years to come.

Many people are reading the situation correctly, but are going about protecting themselves the wrong way. Sure, stocks are overbought and will likely correct, but Treasuries are not the right safe haven play here. Treasuries are going to implode sooner or later, sending yields skyrocketing.

Since inflation pressures are muted or nonexistent amid the most severe U.S. recession in decades, “you are getting real yield in Treasuries north of 3 percent,” said Haag Sherman, co-founder and managing director of Salient Partners, a Houston based investment firm.

The CPI as reported by the government is an unreliable measure of inflation. The government is constantly changing the basket of goods that’s measured, so comparing year over year CPI is akin to comparing apples to oranges.

As it becomes clearer any U.S. economic recovery beyond the end of this year will be sluggish, “you will see a significant degree of risk aversion and the Treasury market will benefit from it,” Sherman said.

Sherman is wrong- Gold will be the ultimate beneficiary.