Treasuries still first port in a storm

Enthusiasm for US Treasury debt has faded since the year began, but there are few alternatives for investors trying to weather stormy financial markets without getting soaked. Money managers say German bunds, currencies from countries with strong fiscal balance sheets such as Sweden and Singapore and even some high-yield corporate debt offer some protection from uncertainty, though all have limitations.
With Japan's unfolding nuclear disaster joining Middle East unrest on an increasingly long list of things that frighten markets, most say the stampede into Treasuries and the Swiss franc may persist for some time to come.
Treasury yields began rising sharply late last year as markets started betting on stronger US growth, though some of the rise was also tied to worries about imminent inflation and a US budget deficit projected to exceed $1.5 trillion.
Last week, PIMCO, the world's biggest bond investor, announced it had cut its US government debt holdings to zero in its $236.9 billion Total Return Fund.
But after peaking at 3.77 percent in February, a nine-month high, the 10-year Treasury yield has lost more than 50 basis points. It stood at 3.22 percent on Thursday.
"You can date the rally in Treasuries almost exactly from the escalation of risk in the Middle East when the Libyan crisis followed the resolution in Egypt," said Alan Wilde of Baring Asset Management, which oversees about $50 billion.
If efforts to contain leaks at Japan's nuclear reactors damaged by the earthquake fail and radiation spreads, "that would only heighten the panic in riskier assets," he said.
To be sure, some other traditional safe-haven assets have rallied in recent days, with the Swiss franc hitting a record high against the dollar. The yen has also soared, although that's being driven by expectations that Japanese investors will bring money home to pay for reconstruction. Another factor: margin traders have been forced to liquidate positions financed with borrowed yen as the currency soared to an all-time high against the dollar.
Ten-year German bunds have also drawn buyers, and some market participants argue that these are more attractive safe havens than the dollar, given worries about US finances. "US fixed income has gone bid, but that's mostly US investors selling equities and buying fixed income," said Douglas Borthwick. managing director of Faros Trading, a Connecticut-based advisory and execution firm.
"We've seen days when the euro has gone bid, and the German front end has been in demand," he added, begging the question of whether the dollar is losing 'flight-to-quality' status."
The euro is about 3 percent firmer against the dollar since February 9, the day Treasury yields peaked, according to Reuters data, and about 0.5 percent stronger since the Japan quake.
Many market participants say the evidence for that is not yet obvious.
"Safe havens are best defined as things that go up in times like this," said Jonathan Lewis, principal at Samson Capital Advisors, with more than $7 billion in fixed-income assets. "Treasuries have gone up, the Swiss franc has gone up, but stocks haven't gone up and the commodity index rolled over."
What's more, Wilde said the dollar is extremely cheap now at about $1.40 per euro and near record lows against the yen, which makes dollar-denominated assets a good buy.