Revisiting the Flight-to-Safety Trade

by: Bill Luby

Once again the S&P 500 index approached the cliff at 1040 and for now at least has backed away and found a little breathing room.

With anxiety running high, investors have embraced the flight-to-safety trade once again. The current preference is for U.S. Treasuries, the dollar (NYSEARCA:UUP) and, to a lesser extent, gold (NYSEARCA:GLD).

While the most conservative plays are necessarily on the short end of the U.S. Treasury yield curve (represented by ETFs such as SHV and BIL), note that in the chart below I have included the long bond ETF (NYSEARCA:TLT) to provide a higher volatility bond for comparison purposes. The trend is fairly well established at this stage. Of the flight-to-safety vehicles, U.S. Treasuries are attracting the most interest (perhaps due to deflationary concerns), followed by gold, with the dollar the least enticing alternative, today’s 0.8% rally notwithstanding.

Not shown in the chart below is VXX (iPath S&P 500 VIX Short-Term Futures ETN), which is more of a hedge than a flight-to-safety alternative. During the period from the April 23 high through yesterday (June 28) VXX is up 53.4%, with a volatility level of 94.5. (Click to enlarge)


Disclosure: Short VXX at time of writing