Investors tend to respond to impending doom by selling risky stuff and hiding out in safer assets — namely, bonds in places such as Germany and the U.S. There’s a problem with that formula this time around: Traders aren’t so sure they can find anything that’s truly safe right now. So, instead of piling into sovereign debt of developed nations, traders are pulling their money out of those places as the Greek economy teeters on the brink of collapse, Puerto Rico talks about delaying some debt payments and China’s stock market suffers its biggest selloff since 1992.
Investors yanked $2.9 billion from European government bond funds last week, more than ever before, and pulled $699 million from short-term investment-grade U.S. bond funds, Bank of America Corp. and Wells Fargo & Co. data show. While these assets have traditionally been havens during rocky periods, they look less appealing now after more than six years of unprecedented monetary stimulus that pushed yields to record lows.
Why is that a problem? Well, the European Central Bank’s bond-purchasing program this year sent yields so low (negative, in fact) that investors revolted, selling German debt in the face of some signs of economic growth and causing unprecedented volatility. In the U.S., the economy has improved enough that the Federal Reserve is planning to raise interest rates this year from virtually zero, where they’ve been since 2008.