May 24, 2012
While the 1% has been a subject in the press a lot recently, I’d like to take a look at .07%.
While many people are talking about the 1% or 99%, we are questioning a different number: .07%. Believe it or not, .07% is the rate that Germany recently sold €4.56 Billion ($5.77 Billion) two year bonds. The Greek and Spanish dramas are unsettled, and German investors have been seeking the safety and protection of bonds – even at .07%. Regrettably, the flight to quality is not unique to Germany.
In the U.S., two year Treasury yields are .29%. In September, 2011, yields traded at an all time low of .16%. Compare this to the last five year average yield of 1.34%, or average yield of 2.76% since January 2000. In the normalized period of 1980 to 1999, two year Treasuries averaged 7.95% yield. From 7.95% to .29%, that’s quite a rally. (Don’t forget Bond Math 101: yields down, prices up.)
German bund yields are close to zero, or at least closer to zero than U.S. Treasuries. The question is: how much lower can they go? We are still in an extended bond market interest rate rally that began in the early 1980’s. Fixed income investors have certainly been rewarded over this long period. Due to the recent unsettled global markets, investors have once again flocked to bonds as a bastion of safety.
A casualty of the economic and political upheaval has been the renewable energy markets. The rise and fall of government stimulus, the move to retrenchment by government policies, and low natural gas discoveries in the U.S. have all put pressure on the balance sheets and business models of many companies in the clean tech (green) sector. And, of course, the laws of supply and demand in this new growth industry have created many new winners and losers. It is likely that the playing field will look differently in the next several years than did the mega stimulus period of 2009-2010.
As investors debate both the short and long term outlook for Facebook after the fallout of the recent IPO, we are looking at interest rates, and the drivers of rates. Rates may go lower, but there is not a lot of room. Government expenses may be cut more, but not much before political leaders push economic activity over the cliff. From our vantage point, the drop in rates has created both risk and opportunity for many investors and many investment sectors.
We are always looking at the green, clean technology hedge fund sector, and we recognize how poorly long only strategies have performed over the last 18 months. On the other hand, specialist green hedge fund and hedge fund of fund strategies have been able to deliver positive results in a difficult market environment.
During our long history of investing, we have seen some of the most obvious opportunities have been realized in periods of uncertainty with poor market psychology.
It seems that the world is becoming more uncertain, so it is gratifying to identify even a single event that reflects confidence, however unusual. Yesterday, I was standing at Rockefeller Plaza near the ice skating rink (where the outdoor café is today), and noticed that a plaque had been inserted into the stone pavement where the annual Christmas lighting takes place. The plaque has a head start on the holiday season and proudly displays in bronze the date for this year’s lighting: November 28, 2012. A small victory for certainty!
While the date for the festivities is well known, not much else is at this time. Maybe now is the time to do a review of past ideas, as well as hunt for new opportunities.