The crazy drop in bond yields: even risk-off assets are risky




30-year Treasury bonds rose 2.7% on Friday as investors continued to flee risk assets and buy government debt. "Never in U.S. history have yields been this low, so there is no historical benchmark against which to gauge what this means," Currency Hedger Ireland writes.


The dollar has ceased to be a safe haven, he says, because there aren’t enough safe assets to make it a haven. Utilities stocks are an example: Typically they trade like bonds, because of their highly predictable cash flows. But during the last couple of weeks, "utilities stocks have fallen (using the XLU ETF as a benchmark) despite the fall in bond yields." Currently, utilities are worth 10% less than the historical relationship with the 30-year bond yield indicates.


The reason for the decoupling is obvious: leverage. Before 2008, utilities had net debt equal to 3x Ebidta. Now the ratio is well over 5x. And the recent stock market correction has sparked a sharp deterioration in credit markets, "putting a cloud over the most-levered stock market sectors, including utilities and real estate."


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