Risk Off Trade Is Getting Crowded. It's More Worry Than Panic

Dow Jones
02 Apr

Anxiety about President Donald Trump's tariff plans is driving a surge toward safe haven assets such as gold and Treasury bills. Just don't call it a panic yet -- it's closer to a worry.

Wall Street has been prepping for the tariff rollout on Wednesday, with projections on inflation moving higher. Goldman Sachs raised 2025 core inflation estimate by 0.5 percentage points. Meanwhile, targets for the S&P 500 are headed lower. The concern is that tariffs could push up consumer prices and curb economic growth.

That has led investors to put money into the world's safest assets at a dizzying pace.

Net flows into the SPDR Gold Shares exchange-traded fund in February and March, on an average, were more than 30 times the average seen over the past two decades.

The front-month Comex Gold futures contract gained 19% in the first quarter, the best gain for gold since 1986. The precious metal stuck close to its record level on Tuesday.

The SPDR Bloomberg 1-3 Month T-Bill ETF saw net flows of $3.2 billion in March, the highest monthly flow in two years. It suggests the market is seeking stability and wants to park its capital in highly liquid, low-duration assets as a hedge against potential volatility.

A risk-off tone has also pushed longer-term U.S. government bond yields to their lowest point of the year. Falling yields indicate increased demand for bonds.

The 10-year yield declined to 4.156% on Tuesday, its lowest level since Dec. 6. Goldman sees 10-year falling to 4% by year-end, revising the call lower from 4.35% on Tuesday. The 30-year yield is at its fifth-lowest level this year.

"Investors' nervousness is showing up in hedge behaviour," wrote Stephen Spratt, a rates strategist at Société Générale SA in Hong Kong. "With markets expecting a broad tariff move to be immediate on the inflation side, but biting on the growth side, duration longs are in vogue."

Still, there just aren't enough signs to call this a full-blown panic -- just look to the corporate bond market. Junk bond spreads, or the additional yields the riskiest companies are offering over risk-free bonds, moved to 3.55 percentage points as of Monday's close, the highest since August. But that can't be considered ugly by any measure.

The 10-year average for these spreads is about four percentage points and the market had been below three percentage points until last month. Rosenberg Research's David Rosenberg wrote that he doesn't "like the spread very much at all," meaning they aren't offering up much yield over Treasuries.

The same logic can be applied to bonds from U.S. blue-chip companies. Those rated Baa offer 1.76 percentage points in additional yield, which is a eight-month high, but still lower than historic highs.

"A rise above 2% consistently that would be a much more negative signal that the bond market is starting to agree with nervous investors about future economic growth," wrote Tom Essaye from Sevens Report.

Also consider stocks. The SPDR S&P 500 ETF Trust saw an outflow of $18.4 billion in March and is down over 4% this year. But the market isn't far from its record level. The S&P 500 is 8.3% away from its last record close of 6144.15 on Feb. 19, after closing 0.4% higher on Tuesday. It isn't clear what the administration has in store, but no one is running for the hills just yet.

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