'Safe' investments such as gold hit hard in 2013
By Steve Rothwell, APNEW YORK--Being safe left some investors sorry in 2013.
January 2, 2014, 12:14 am TWN
That's because some financial assets that are considered safe and steady lost money.
After three decades of steady gains, bonds had a bad year. Prices for Treasurys and other kinds of bonds slumped as the U.S. economy improved, investors' nerves steadied and the Federal Reserve prepared to pull back on its huge bond-buying program.
Gold was another investment that went from haven to headache. The price of gold gained steadily for more than a decade, driven by concerns about the health of the U.S. economy and rising inflation. The metal plunged in 2013 as the U.S. maintained its recovery and inflation was nowhere in sight.
Keeping money in a bank account was another safety-first strategy that worked when the stock market was plunging in 2008, but not since then. With the Standard and Poor's 500 index soaring 29.6 percent in 2013 — or 31.9 percent including dividends — returns from a savings account looked meager.
Here's a look at how some of the supposedly safe assets have performed.
Treasurys and Other Kinds of Bonds
From 1981 through 2012, demand for Treasurys rose and their yields, which move in the opposite direction, fell. The yield on the 10-year Treasury note bottomed at a record low of 1.39 percent in July of 2012, when the European debt crisis intensified and people rushed to buy U.S. government debt securities.
In the 1980s, investors bought Treasurys as inflation eased and interest rates fell. That made higher-yielding Treasurys already in the market more attractive. Investors also bought Treasurys during the financial crisis in 2007. Treasurys are considered among the safest financial assets because they are backed by the U.S. government, which, at least in theory, should always be able to repay its debts.
Bonds also rose as the Fed began purchasing Treasurys in response to the financial crisis and the recession to keep interest rates low to boost the economy. The central bank has been purchasing US$85 billion worth of Treasurys and mortgage-backed securities each month.
The U.S. economy now appears to be gaining steam and the Fed, the biggest buyer of Treasurys, plans to start reducing its purchases in January. The yield on the 10-year Treasury note climbed from 1.76 percent to as high as 3.04 percent in 2013 as investors sold bonds in anticipation of the Fed's pullback.
The rise in yields and the corresponding decline in bond prices has meant losses for bond investors, prompting them to cut their holdings.