Where’s the safe haven these days?

Brad DeLong asks a question and then, well, doesn’t answer it:

If an investor today did wish to insure against geopolitical catastrophe, how would he or she do so?…

The principal risk I see today is that being borne by investors in dollar-denominated debt — and I don’t believe they are charging a fair price for what they are doing. But a quarter of my brain wonders how investors should attempt to insure against the lowest tail of the economic-political distribution, and that quarter of my brain cannot see which way somebody hoping to insure against that risk should jump.

He does note that there’s even, theoretically, some upside risk to an uptick in global risk aversion:

If people are risk-averse enough that increased fear of the future causes them to save more, rising global uncertainty will raise bond and stock prices, and lower interest rates and dividend and earnings yields.

In any case, let’s say that DeLong is right, and investors in dollar-denominated debt should get out early while they can. Where should they go in a world where “uncorrelated assets are not correlated“? If you believe the likes of Jerome Booth, at Ashmore, the answer’s easy: domestic-currency emerging-market debt. But that’s pretty hard to invest in, outside Mexico — and Mexican local debt is down 4.3% this year. Maybe we should all invest in euro-denominated bonds instead. But are they really uncorrelated with US bonds? And are they really a good bet in a rising-interest-rate environment?

This entry was posted in Econoblog. Bookmark the permalink.