Moving to a ‘Defensive’ Position
More investors are deciding that the best offense is a good defense.
With gloom mounting over Asia’s economic woes, the Russian government’s cash shortage and the India-Pakistan atom bomb escalation, some of the hottest investments are some of the (traditionally) least exciting: “defensive” securities such as bonds and utility stocks.
The yield on the bellwether 30-year U.S. Treasury bond, for example, fell to 5.77% on Monday from 5.80% on Friday, and now is the lowest since Jan. 15.
The yield had been above 6% as recently as May 11.
Yields on shorter-term bonds also are sliding as investors bid more aggressively to lock in yields on high-quality securities. The two-year T-note yield fell to 5.52% on Monday. It was 5.66% on May 11.
“The flight to quality is the kicker that’s moving us up” in terms of bond prices, said David Jallits, who helps oversee about $5.5 billion of bonds at Strategic Fixed-Income in Arlington, Va. He’s holding some long-term T-bonds on the expectation yields will fall to a record low in the months ahead.
Investors also are snapping up other defensive securities, including high-dividend-yielding utility stocks. The Dow Jones utility stock index jumped 7.16 points, or 2.5%, to a record 291.81 on Monday.
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Some electric utilities made price moves more typical of technology stocks. American Electric Power jumped $1.94, or 4.3%, to $47.31. New York’s Consolidated Edison leaped $2, or 4.7%, to $44.81.
AEP shares pay an annual dividend of $2.40 a share, giving the stock a 5.1% yield. Con Ed’s yield is 4.7%.
U.S. bonds are particularly attractive to Japanese investors, analysts say. No wonder--with the dollar surging to seven-year highs against the yen and with U.S. bond yields far above the under-2% yields of Japanese government bonds.
Japanese investors “will have to buy Treasuries,” said Hiroshi Kawakami, a trader at Hyakujushi Bank Ltd.
For now, at least, bonds are beating U.S. stocks: A $10,000 investment in 30-year T-bonds made on April 29--when yields were 6.07%--has appreciated to $10,450. (Bond prices go up as yields go down.) That represents a gain of 4.5% in a little more than a month, and compares with a return of about 1.5% for the Standard & Poor’s 500-stock index, including dividends, during the same period.
But can bond yields go much lower? On the one hand, yields are “boxed in” because the Federal Reserve is holding its key short-term interest rate at 5.5%.
On the other hand, if investors perceive that the global economy’s troubles will worsen--and that the U.S. economy might slow sharply later this year--long-term yields could easily sink through the Fed’s 5.5% line, analysts say.
As for utilities: They weren’t doing too badly even before Monday. Through Thursday, the average utility stock mutual fund was up 5.7% year-to-date, according to Lipper Analytical. That lagged the 9.3% rise in the average general stock fund, but it was better than the average small-stock fund, up 5.4% in the period.
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A Rush to Safety
Long-term Treasury bond yields slid Monday to their lowest level since mid-January, as investors rushed into “defensive” investments amid worries over global economic turmoil. The 30-year Treasury bond yield, weekly closes and latest:
Monday: 5.77%
Source: Bloomberg News
