Investors' near-manic enthusiasm for havens has squeezed out what little upside remained in U.S. government debt. It's also left bond holders vulnerable should rates move upwards, or even look like they might go that way. A calming of nerves on the European front, for example, could send the 10-year yield up half a percentage point or so as the flight-to-safety play unwinds.
In 2012, investors need to give alternatives very serious consideration. For yield boosts in the near term, mortgage-backed securities – the government-backed, not subprime, kind – look attractive. Fannie Mae and Freddie Mac bonds can offer investors a 1- to 1.5-percentage point bump over Treasuries.
Corporate bonds also deserve examination. Thanks to a massive wave of refinancing in the years following the 2008 crisis, many companies with riskier credit profiles have lowered their financing costs and pushed out debt maturities to 2013 and beyond. Default rates are expected to be just 2 per cent over the next year – or only 4 per cent if there's a recession. The width of credit spreads over Treasuries, meanwhile, gives investors in high-yield bonds a buffer to absorb the unwelcome hit of rising interest rates.
It may be difficult to think of high-yield corporate debt as a safe haven and some, like bottom-of-the-barrel CCC-rated junk, certainly don't fall in this category. But bonds issued by higher-rated companies not held hostage to the ups and downs of economic cycles, could be a good place to park cash.
It's quite unlikely U.S. Treasuries will get truly clobbered in the year ahead, and there's certainly no reason to abandon the asset class altogether. The Fed, after all, has said that it will leave short rates near zero at least until 2013 and the United States still enjoys a privileged position in the world of finance. The dollar is the global currency reserve and its markets are the deepest and most liquid. But with so many crowding into Treasuries in 2011, investors should look for the exit before everyone else does.