The backing of a stable political system.dollar, the Japanese yen, and the Swiss franc - that investors have traditionally considered to be safe havens, as they have a mix of characteristics that make them attractive to hold in times of market uncertainty. We’ll explore three currencies - the U.S. A possible explanation for the drop was that gold fell victim to panicked selling by investors, 4 in which margin calls on leveraged positions sparked a “dash-to-cash”. 3Īs shown in Exhibit 3, gold’s performance reversed course a few times, but the most notable reversal was a drop in early to mid-March. Historically it has performed well in market selloffs (for example, gold returned over 20% during the sharpest part of the Global Financial Crisis: SeptemMarch 9, 2009) 2Īlthough gold did not provide the same level of relief during the COVID market crisis that it did during the Global Financial Crisis, its -2.74% return outperformed equity markets and other commodity sectors, such as energy.It provides a source of diversification to equity-dominant portfolios (gold’s historical correlation with the Equity factor is ~0.05), and.It’s a hard asset with real world uses and has served as a traditional medium of exchange.Its liquid market makes it relatively easy to buy and sell.Many consider gold, a precious metal, to be an attractive asset to hold in portfolios for a variety of reasons: 1 The bonds reversed course again around March 18th -19th, and rose for the rest of the period.Įxhibit 2: Cumulative Returns of 10 Year Sovereign Bond Futures However, a turnaround started around March 9th, as the dramatic market panic picked up in terms of intensity and investors rushed out of long-term sovereign debt to raise cash in order to meet margin calls and other liquidity needs. In the first few weeks of the COVID market crisis, when risk assets were collapsing, the bonds behaved as expected: yields dropped as central banks cut interest rates and investors ditched risky assets for relatively less risky government bonds. government bonds were the top performers, as yields dropped precipitously over this period.Īcross countries/regions, the bonds were positively correlated, all following a similar path. Almost all posted positive returns over the COVID market crisis period, with the two exceptions being European and Japanese bonds, where yields actually increased slightly. The below exhibit showcases the returns of 10-year government bond futures (in local currency terms) in six major developed markets. Time period: JanuMay 14, 2020.ĭeveloped market sovereign bonds are arguably the most canonical example of a safe-haven asset because of their lower realized volatility relative to stocks and the high expected creditworthiness of their issuers (developed market governments). When equity markets decline, investors typically flock to the safer assets we’ll be discussing.Įxhibit 1: Cumulative Return of the Equity Factor We chose the global equity market as a proxy to determine the crisis period because (1) the crisis is global in nature, and (2) equity risk dominates most portfolios.
It is intended to represent the hardest and sharpest part of the equity market decline thus far. However, we define the dates for the COVID market crisis period as starting with the first day of losses in the global Equity factor (February 20th) and ending at the peak losses on March 23rd. The crisis relating to the spread of the novel coronavirus is ongoing, and its true end date is unknown at the time of this publication. How are we defining the COVID market crisis? Over time, investors have developed a sense of which assets might be expected to behave as safe havens, and in this post, we’ll look at five of those assets and evaluate their performance during the COVID market crisis. However, what might have been considered a safe haven in one market crisis might not be in the next, and it’s hard to know ex-ante which assets will behave as safe havens in future market crises. While most investments are sinking, these assets tend to maintain their value, appreciate, or otherwise outperform during crises. Safe-haven assets are those that have tended to perform well in volatile market environments. When financial markets are in crisis, like they were in late February through mid March or during the Global Financial Crisis of 2008, investors tend to flock to assets that they consider safe and high quality.
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