Economists, business executives, analysts, and certainly employees are hoping it doesn't become an 'era of risk aversion' - - a longer period where businesses shun expansions and new projects, and investors avoid stocks.
Further, the risk-aversion theme is prompting investors large and small to flock to the 10-year U.S. Treasuries bond, also called 10-year notes, the yield for which was 3.05% on Friday at mid-day. (Bond prices move in the opposite direction of yield. Hence, when demand is strong, such as now, a rise in bond prices pushes their yield lower.)
Moreover the 10-year yield is likely to fall further in the next two quarters, as more investors flock to safe investments amid the U.S. recession, so says economist Richard Felson.
"We're seeing the value of safety come to the forefront. In this climate, investors don't care about yield, their primary concern is capital preservation," Felson said. "And despite the increase in debt the United States is likely to record over the next two years, the lowest risk investment remains U.S. Treasury notes. It's quickly becoming a sort of electronic mattress, the way savers used to store money in mattresses decades ago. Investors are saying, 'Here, take my money and store it until conditions improve.' "
Felson sees demand for Treasuries increasing during the next six months, with the yield on the 10-year U.S. Treasury dropping to 2.65-2.75% by the end of Q2 2009. Historically, in normal times, that would be a zero real rate of return, assuming a 2.75-3% inflation rate. But, as investors know, these are not normal times. Inflation is trending lower, and there is now concern among some economists about the appearance of deflation - - a period of declining prices. If the latter is the case, investors may register a 2% (or higher) rate of return on a 10-year Treasury note.
"A 2% return seems like a measly return, but as any investor who's looked at that Dow knows, being flat or slightly ahead is a victory under these economic conditions," Felson said.
Bond Market / Economic Analysis: Increasingly, it's becoming a capital preservation environment. Stocks look cheap by historical measures, but until the U.S. economy shows signs of recovery (lower home foreclosures, the resumption of job growth, rising median incomes), stocks, with a few exceptions, remain high-risk investments.
Nuclear power is on the comeback trail
Apple backs AT&T in continuing spat with Verizon
Closing Bell: The recession is still over, still... do you feel it?
