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When Treasuries are hotter than stocks

The U.S. government has never been more in debt, and some economists see fiscal disaster ahead. Even so, the hottest investments going are... (wait for it!): U.S. Treasury notes and bonds — much to the consternation of economists and analysts who predicted otherwise.

The New York Times tells the story:

In a reprise of the flight to safety that occurred during the financial crisis of 2008 and early 2009, people have been parking cash in Treasuries and fleeing stocks, which, of course, have had better long-term returns historically....

This time around, the great cash migration started with the debt crisis in Greece and elsewhere in Europe, not in the United States, but the effects on the American stock and bond markets have nonetheless been severe.

Last month, for example, the Standard & Poor's 500-stock index dropped 8.2 percent....

For people holding Treasury bonds, it's been one of the best of times. In May, long-term Treasury mutual funds outperformed every traditional category of stock fund, according to Morningstar data, returning 5 percent....

[A] vast majority of economists and market strategists were forecasting a different chain of events. Treasury yields were universally expected to be rising, not falling, as the United States recovered from a deep recession. The domestic economy is, in fact, growing, and corporate profits have been rising, but the European crisis has overturned many expectations.

All of which goes to show that the future — even the short-term future — is tough to predict. In fact, in some ways the short term is more difficult to predict than the long term.

Here's the way the NYT sums it up:

[I]t would appear that there is some reason for long-term optimism for stock investors. For the short run, alas, more volatility is probably in order.... Unless you're focused on a distant horizon, it may be a difficult summer.

If you are focused on a distant horizon, it may be best to just ignore the market and focus instead on having some summer fun.

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