No Need To Pay Up For Safety

July 10, 2012

The flight to quality in financial markets is hardly news, especially with Europe seemingly on the brink. But losing money to preserve capital is neither wise nor necessary.

I’ll explain, but first a bit of background.

The perceived risk of Spain and much of Europe collapsing has resulted in a rush toward liquid assets deemed to be bastions of safety—namely short-term debt of safer countries like the U.S., Germany and the Netherlands.

It’s time to add France to that list.

For the first time, 13- and 24-week French Treasury bills sold at negative yields.

This means that investors offered to pay more money today than they will receive in three or six months from the French government. This surprising turn of events brings to four the number of European countries whose T-bills have negative yields: Austria, Germany, Netherlands and now France.

3-Month Sovereign Curves

This comes on the heels of new quantitative easing in the U.K. and rate cuts across Europe aimed at stimulating stagnant economies across the continent.

Denmark’s central bank made the boldest move of the lot by reducing the short-term deposit rate to -0.20 percent. Yes, institutions must now pay the Danish central bank to hold their deposits.

The fear of contagion is spilling across the Atlantic with investors in the U.S. seeming less willing to part with U.S. Treasurys in anticipation of the Federal Reserve potentially going forward with QE3—the market’s nickname for what would be the U.S. central bank’s third round of quantitative easing since the market collapse of 2008.

Investors are faced with trying to preserve capital while searching for some semblance of yield.

While this may sound obvious, negative yields are no way to preserve capital.

And, as I pointed out almost a year ago, after expenses, neither is a fund like the SPDR Barclays Capital 1-3 Month T-Bill ETF (NYSEArca: BIL).

The truth is most retail investors are better off putting money in a certificate of deposit, getting the benefit of guaranteed interest payments and FDIC insurance.

For those looking to invest more than $250,000, in my view, that’s worth taking on some credit risk to avoid paying up for preserving capital, at least in nominal terms.

 

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