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Desperately seeking havens

Tuesday, March 04, 2008

The Abnormal Returns blog does a nice job summarizing the gyrations in the fixed income markets, demonstrating just how desperate investors are to hide from the ravaging effects of rising inflation and slow economic growth.

For starters, investors have grabbed at five-year TIPS (or Treasury Inflation-Protected Securities) with such enthusiasm that the yields have dipped below zero, a level not seen before.

Then there is the yield curve: Sure, it is steepening – but how it is steepening is particularly interesting. Long-term bond yields are falling, but short-term bond yields are in freefall.

And third, fears of an economic slowdown are having a big impact on high-yield debt. According to one measure, high yield bond spreads are wider than they have been since early 2003.

“Safe havens against the perils of stagflation are few and far between,” Abnormal Returns said. “The obvious ones, like TIPS, have already been bid up to seemingly unsustainable levels. No one said this investing business was going to be easy.”

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