The latest round of issues in Greece has reignited demand for safe havens across the board. The highly indebted nation appears on the verge of default unless austerity measures are swiftly passed and another bailout is received from richer nations in the euro zone. While these measures seemed relatively certain to pass a few weeks ago, European governments are now growing skeptical of Greece’s ability to survive this storm, especially considering the nation’s rock-bottom credit rating and ultra-high yields on its debt. Furthermore, the country’s Prime Minister, George Papandreou, seems unable, or at the very least unlikely, to get the country under control, even with a new coalition government.
As a result, investors are growing increasingly worried that a Greek default is all but inevitable at this point, potentially setting off a chain reaction among some of the other PIIGS members. “The market is getting very, very, very nervous,” said Koen De Leus, strategist at KBC Securities. “It’s chaos in Greece and I’m rather worried that Papandreou doesn’t have it under control, and if he doesn’t have his country under control he can’t delegate a change in government.” Koen continued by saying that the contagion fears were very real and that he thinks that “the stakes are even bigger than what was at stake when Lehman’s defaulted.” Much like in the Lehman situation, a Greek default could put a cloud of doubt over others in a similar situation, making it increasingly difficult for Ireland and Portugal to finance their deficits as well, potentially leading to a credit event in three countries, a nightmare scenario for the European continent [ETF ideas for an ex-Europe Portfolio].
Thanks to this turmoil, investors have increasingly turned to Treasury Bonds as a safe haven from the growing storm in Europe. Short-term debt has been especially popular as these notes have less interest rate risk and a much shorter duration, making them ideal securities for those seeking a place to wait out the events overseas. Two-year T-Bills recently fell to a yield of just 30 basis points, an all-time low for the short-term notes, before they regained some of their yield losses to finish around the 0.38% mark. Should the crisis in Europe in continue, these bonds could retest these all-time lows in yields once again today, but after that there isn’t exactly much further the yields can fall, suggesting that bonds could be stuck in this territory or face a sharp pull back if the Greek situation is contained [Highlighting The PIIGS ETFs].
With this backdrop, investors should look for the Barclays 1-3 Year Treasury Bond Fund (SHY) from iShares to be in focus throughout today’s trading session. The fund tracks the Barclays Capital U.S. 1-3 Year Treasury Bond Index which measures the performance of U.S. Treasury securities that have a remaining maturity of at least one year and less than three years. Despite its short-term, low volatility nature, the fund has made some decent gains over the past quarter, although less so than comparable longer-term debt. In fact, some longer-term funds that focus on bonds with at least 20 years to maturity, such as EDV, have gained close to 2.6% in the past week alone, suggesting that those funds may be better choices for investors seeking capital gains in the market [Bond ETFs: 12 Stops Along The Risk/Return Spectrum].
With that being said, we look for SHY and the short-term corner of the market to be especially in focus given the near all-time lows for yields that this slice of debt is experiencing. There is simply not much further for yields to fall and it remains to be seen how the Greek drama impacts this fact. Should the turmoil in Europe continue, investors could continue to pile into this safe haven to close out the week further adding to the gains for this popular iShares fund. If, however, the Greek debt crisis appears to be under control and if euro zone leaders manage to agree on a bailout package for the highly indebted nation, look for SHY to slump back to close out the week as traders embrace riskier assets [for more ETF ideas, Pro members can check out the ETF Insider].
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Disclosure: No positions at time of writing.