Have Safe-haven Assets Outperform During the COVID-19 Pandemic?


As COVID-19 spread across Asian, Europe, and then North and South America, the initial demand for safe-haven assets such as gold and fixed income securities surged, and while hope has replaced fear, putting downward pressure on volatility securities, gold trading and has continued to buoy the yellow metal. Bonds have also remained buoyed and with the Fed continuing to add liquidity treasury note prices are likely to remain at elevated levels.


The Initial Shock

As COVID-19 spread across the globe and infections started to spread at a geometric rate, the only defense was to quarantine. Countries began the process of closing their economies, shutting all non-essential businesses, and in many circumstances telling citizens to stay at home. Demand for goods and services that are discretionary tumbled and economic growth dropped sharply. In the United States Q1 growth contracted by approximately 5%, which was the biggest drop since the financial crisis.

In the wake of the disruption, riskier assets tumbled. The S&P 500 index declined by 35% from mid-February to late March. The beneficiaries of this fear were safe-haven assets such as gold and bonds.

What Securities Benefited from the COVID-19 Virus?

As COVID-19 spread, investors dumped stocks and fled to fixed income securities such as sovereign bonds. This included the US treasury bond, which saw its price surge to new all-time highs. Since prices and yields move in the opposite direction, the owners of treasury bonds will receive less than 1% to invest in US treasuries. The rate on the 10-year yield dropped from 1.6% in mid-February to less than 40-basis points by the end of March. This also occurred in Europe and Asia. The German 10-year yield dropped from negative 20-basis points to minus 90-basis points. The Japanese 10-year yield dropped from zero to -20-basis points.

Gold prices also benefited substantially in the wake of the pandemic. Gold prices rallied $200 per ounce from mid-February to mid-May. Many investors added gold to their portfolio as a way to diversify their holding and several replaced riskier assets with gold. The demand for gold options, surged higher in February and March pushing the implied volatility on gold to record highs. The implied volatility on gold, which measures the demand for options surged from 12% to 55% in approximately 20-days.

How are Gold and Bonds Performing as Restrictions are Eased?

As countries around the globe started to ease restrictions, riskier assets began to rally. Stocks, oil, and indices started to rebound. Many surged to all-time highs as revenues surged in the wake of the pandemic. For example, the need to get consumer goods at home, allowed Amazon to dominate commerce.   Grocery delivery and alcohol consumption surged allowing Walmart to experience a surge in revenues.

Despite the rebound in riskier assets, safe-haven assets like gold and bonds remain stable. Gold volatility declined from 55% back to 12%, as investor fears eased. Gold prices remain near their 7-year highs and continue to trade at elevated levels. Bond prices have also remained elevated. This comes as central banks around the globe cut rates and initiated bond purchase programs. In March, the Federal Reserve cut rates multiple times and initiated an uncapped quantitative easing program that has provided enormous liquidity.

The Bottom Line

With central banks continuing to provide liquidity and governments adding stimulus programs that flush the markets with liquidity, the value of gold and bonds should remain elevated. While riskier assets continue to rebound, many investors will want to hold on to safe-haven assets to protect themselves if a second wave of the COVID-19 virus appears before a vaccine becomes available.

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Have Safe-haven Assets Outperform During the COVID-19 Pandemic?
Bonds have also remained buoyed and with the Fed continuing to add liquidity treasury note prices are likely to remain at elevated levels.
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