March 4, 2021

Investors, Worried About Debt Talks, Look for Havens

Investors are seeking alternatives to United States Treasury bonds as worries escalate that lawmakers will fail to reach an agreement to rein in the deficit and raise the federal debt limit in the coming days. Some have shifted funds into corporate bonds, others are forgetting about yields entirely and parking their money in cash, and more are looking to those classic safe havens of yore, gold and the Swiss franc.

Investors are getting leery of stocks, however. Shares dropped on Wednesday amid growing worry about the deadlock in Washington and the economic outlook for the country. The broader market as measured by the Standard Poor’s 500-stock index closed 2.03 percent lower, or 27.05 points, to 1,304.89. The Dow Jones industrial average was down 198.75 points, or 1.59 percent, to 12,302.55, its fourth straight decline.

Still, Treasury bond prices remained firm on Wednesday, with the benchmark 10-year bond rising two basis points to 2.98 percent. That shows demand is still healthy for the roughly $10 trillion of United States government debt circulating in the global financial system.

Investors are concerned that a downgrade of United States government debt by the rating agencies, or even the more remote possibility of a default, would erode the value of Treasury securities, which have long been considered virtually risk-free. The trouble is that in the end, safety is hard to find.

“Where are you going to go?” asked Carl Kaufman, who helps manage just under $2 billion at the Osterweis Strategic Income fund in San Francisco. Mr. Kaufman said he was loading up on high-yield bonds, like those issued by HCA, the hospital operator, and Dollar General, the retailer.

Other institutional investors are looking to faster-growing emerging markets.

Daniel Arbess, manager of the $3 billion Xerion fund at Perella Weinberg Partners in New York, is investing in companies that are benefiting from strong growth overseas, especially in countries like China and other Asian markets. Another strategy he favors is investing in natural resources and precious metals like gold that will preserve their worth even if paper currencies decline in value.

“These are our safe havens, not U.S. Treasuries,” he said. “You’ve got to hold your positions with conviction and concentrate on the fixed points on the horizon.”

Gold, already trading near record levels, dipped slightly Wednesday to close at $1,615 but is still up about 40 percent from a year ago. The Swiss franc, another classic refuge for safety-conscious investors, has jumped nearly 17 percent this year versus the United States dollar.

Other traditional havens, including stock and currency markets in Japan and Europe that might have been tempting in the past, are hardly appealing today, given the slow growth and mushrooming debt problems in those areas.

“Safety is a relative concept,” said Tobias Levkovich, chief equity strategist at Citigroup. “There have to be alternatives and the alternatives aren’t that wonderful.”

Corporations are also striking a defensive posture, stockpiling cash at record levels. And as the deadline for Washington to reach an agreement on raising the debt ceiling nears, many could start taking action, according to a survey this month of 305 large corporations by the Association of Financial Professionals.

Nearly one-quarter of the companies said they would sell some or all of their holdings of Treasury securities, while another 28 percent said they would not add Treasuries to their portfolios. A little fewer than half of the companies said they would not make any significant changes to their positions.

Even though default on government debt remains a remote possibility, some companies are already trying to get out in front of the market jitters. Capital One Financial, for example, moved up a $5 billion sale of billions in stock and bonds to avoid possible turbulence ahead of the Aug. 2 deadline the Treasury had set for lawmakers to raise the $14.3 trillion debt ceiling.

Louise Story contributed reporting.

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