People Are Flocking To Safe Investments

Image source:

What's going on?

The price of gold hit a two-year high on Wednesday, one day after many government bonds hit their highest prices ever. Such moves are often signals that investors are nervous.

What does this mean?

Typically, investors flock to government bonds of big, wealthy countries and gold in times of distress. The theory is that the government will always be able to pay you back (even if the investment return is low) and gold will always be worth something tangible, whereas stocks provide a potentially higher (but very uncertain) return. It makes sense that if an investor thinks there are going to be problems in the markets then he/she would move into investments that are perceived to be safer. It seems like lots of people are in that camp right now (although, as a counterpoint, its worth noting that US stocks remain near all-time highs).

Why should I care?

The bigger picture: Low interest rates elsewhere can cause low interest rates in the US. The European Central Bank and the Bank of Japan are directly buying government bonds. Also, the Bank of England is likely to decrease its target interest rate this summer. Remember, when bonds go up in value, the interest they pay investors goes down (explanation here). So, both of those actions push down the interest rates available to investors. In response, many investors have bought US government bonds, which offer higher interest payments – and, in turn, the increased buying has pushed down interest rates in the US too.

For you personally: Yes, it should become cheaper to borrow money. The average 30-year mortgage rate in the US has hit its lowest level in 3 years. Mortgage rates and other interest rates for loans will also be falling in many other countries. That should help support things like house prices and, to some degree, economic activity (e.g. you might buy that new car because its cheaper to borrow the money to pay for it).

Originally posted as part of the Finimize daily email.

The top 2 financial news stories in 3 minutes. Join over one million Finimizers

Read next

Sign up to Finimize

Get the two most important global financial news stories each day. Sent at midnight UK time.

Get started with one email a day

The top financial news stories in 3 minutes.