Safe havens take flight

  • Investors crowded into safe-haven assets in recent days
  • Gold and Treasury yields hit multi-week highs, lows
  • Stock market trend often resumes after dislocation

Gold and bond traders who just returned from remote meditation retreats could be forgiven (briefly) for wondering whether they missed some news about soaring gold demand or a surprise interest rate cut while they were gone.

Treasury prices spiked on Friday and Monday, while yields, which move in the opposite direction of prices, dropped sharply. Gold jumped to a multi-week high, just a few days after closing at its lowest level of the year.

Of course, what happened was likely no surprise to longtime traders and investors who have experienced other market shocks over the years. The bank-sector volatility that weighed on the market between last Thursday and Monday helped trigger what is often called a “flight to quality,” when investors sell risk assets like stocks and rush into the perceived safety of Treasuries and gold.

Tuesday appeared to unwind some of that move as the stock market rebounded early in the day: April gold futures (GCJ3), which on Monday closed above $1,900/ounce for the first time since February 1, drifted lower on Tuesday (below, left). Similarly, the benchmark 10-year T-note yield followed its biggest two-day drop in more than a year (-0.28 percentage points) with one of its second-biggest one-day rally of the past five months (+0.125 percentage points):

Chart 1: April gold (GCJ3) and 10-year T-note yield index (TNX), 2/28/23–3/14/23. Flight-to-quality moves eased on Tuesday.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Flights to quality are often short-lived, but different safe-haven markets don’t necessarily readjust in sync, as an episode from last year illustrates. When Russia initially invaded Ukraine, the 10-year T-note yield dropped 0.28 percentage points from February 25–March 1, 2022, closing at a nearly two-month low of 1.71%. But that was the end of the move—yields reversed to the upside immediately, and haven’t looked back since.

Meanwhile, gold rallied nearly around $56.50 from February 25–March 1, 2022. Unlike the move in Treasuries, though, gold continued to move higher for another week, rallying an additional $105 before reversing to the downside.

But slowdowns or reversals in the flight-to-quality moves in Treasuries, gold and other safe havens don’t mean stock market volatility has run its course. The stock market rallied sharply off its early-March 2022 lows, for example, but the move lasted less than three weeks before the next leg of the bear-market downtrend kicked in.

While Morgan Stanley & Co. analysts don’t think recent events pose a systemic risk to the banking system, they argue they’re another supporting factor for a negative view on economic and earnings growth—a function of Fed policy, which still hasn’t run its course. And that likely implies more downside for stocks before the bear market ends.1

In other words, as was the case last year, while safe-haven assets may reverse relatively quickly after a shock, the stock market trend that was in place before it occurred can re-emerge.

Today’s numbers include (all times ET): Mortgage applications (7 a.m.), Producer Price Index, PPI (8:30 a.m.), Retail Sales (8:30 a.m.), Empire State Manufacturing Index (8:30 a.m.), Business Inventories (10 a.m.), Housing Market Index (10 a.m.), Atlanta Fed Business Inflation Expectations (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Adobe (ADBE), Array Technologies (ARRY), Williams Sonoma (WSM), Guess (GES).


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1 What Bank Wind-Downs Mean for Equities. 3/13/23.

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