When you are investing in treasury bonds, you are essentially lending money to the government that issued the bond. Treasuries are considered to be a safe haven in times of economic crisis because riskier asset classes like equities usually gets hammered downwards. Of course, there are treasury bonds that can default if the countries are facing bankruptcy like Greece and Portugal but the flight to safety is usually to an excellent rated bond like the US bond.
It is interesting to note that just a couple of months ago, the US Fed was bullish about their economy and inflation target and they were upbeat about raising the interest rate. This sends the treasury bonds yield upwards upon announcing the news. A couple of months now and it is incredible to see where we are on the treasury bonds. With the ongoing crisis happening across the oil sector, China landing as well as Euro crisis, we have plenty of investors who are abandoning the riskier assets and flight to safety to treasury bonds and gold as safe haven.
In fact, as of today, risk-off sentiment saw heightened demand for safe haven treasuries, with the 10-year US government bond hovering around 1.56%. This is incredible considering where are on the history (which I will present later) of the treasury yield and the intention to raise the interest rate further. It almost feels like there are already fear in the market.
If you look across the historical yield data of the 10-year US treasury bond all the way from 1912 to 2016, the lowest yield it ever goes down to is 1.40%, which is not far away given where we are at 1.56% right now.
This is indeed a historical moment that we are witnessing given that Japan, Germany and Sweden Central Bank all have historical low yield (or negative) that can be a very dangerous tool to implement since this might result in a currency war.
At the end of the day, this is simply an indication tool that we can analyze from but if everyone is willing to put their money where they think is “safe” right now, then you and I can bet where we are on the economy for sure.