Quora Answer: Did the 2008 Global Economic Crisis Present Some of the Best Investment Opportunities in Government Treasury Securities?

The following is my answer to a Quora question: “Did the 2008 global economic crisis present some of the best investment opportunities in government treasury securities?”

No, and the data says so.  In hindsight, it seems obvious, but we did not know then what we know now.  The question assumes its own conclusion.  Government treasury securities did rally hard during the 2008 crisis.  Nobody disputes that.  The ten-year US Treasury yield fell from 4.21% at the end of 2007 to a low of 2.055% by 30^th December 2008, and the iShares 20+ Year Treasury Bond ETF, TLT, rose over 40% by December of that year while the S&P 500, tracked through the SPDR S&P 500 ETF, SPY, fell 50% from its 2007 peak to its 2009 trough.  Every panicked investor who fled into government debt during the autumn of 2008 made money, on paper, in the short term.  That is not the same question as whether Treasuries represented the best investment opportunity of the crisis.  It emphatically was not, and the further into the data one goes, the more indefensible that framing becomes. 

A flight to quality is, definitionally, a stampede.  When every frightened investor on the planet simultaneously piles into the same asset class, the price of that asset class gets bid up, and the forward-looking return collapses in direct proportion to how crowded the trade has become.  Locking in a ten-year Treasury yield of roughly 2% to 3% in November and December 2008 did not represent an opportunity.  It represented buying safety at the moment safety was most expensive, and it locked holders into a decade of historically depressed yields because the entire market made the same panicked decision at the same time.

The Warren Edward Buffett Example

Warren Edward Buffett published an opinion editorial in The New York Times on 17^th October 2008, titled Buy American.  I Am.  He stated he had been moving his personal account out of Treasuries and into American equities, reasoning that a “climate of fear is your friend” as an investor, and that a climate of euphoria is the enemy.  He was not buying government bonds.  He was buying businesses, at prices the panic had made absurd, while everyone else queued up to accept 2% for a decade of their capital.  The S&P 500 bottomed in March 2009 and delivered a total return exceeding 400% over the following decade, a figure no Treasury purchased during the 2008 panic came remotely close to matching, because a Treasury purchased at a 2% to 3% yield mathematically cannot.

By late 2008, the spread between high-yield corporate bonds and Treasuries had blown out to nearly 2,000 basis points, the widest gap recorded since the Great Depression.  Investment-grade Baa corporate bonds were trading roughly 550 basis points above the ten-year Treasury by February 2009, according to the US Treasury’s own statement to the Treasury Borrowing Advisory Committee at the time.  That spread was pricing in a wave of corporate defaults that, for the overwhelming majority of solvent issuers, never actually arrived.  Anyone who bought quality corporate credit at those distressed spreads was not merely capturing a coupon.  They were capturing a spread compression trade of historic proportions once the panic subsided, on top of the underlying yield, a combination no Treasury purchase could offer by construction.

The David Alan Tepper Example

While the consensus view in early 2009 was that America’s largest banks faced imminent nationalisation, David Alan Tepper, founder of Appaloosa Management, bought severely distressed bank equities and debt directly into that fear.  He purchased Citigroup shares at an average cost of roughly $0.79 and Bank of America shares at roughly $3.72, alongside American International Group debt purchased at ten cents on the dollar and Washington Mutual bank debt bought near its lows.  By the end of 2009, Bank of America had roughly quadrupled from its trough, and Citigroup had roughly tripled.  Appaloosa Management posted a net gain of approximately 132% for the year, generating close to $7.5 billion in profit for the fund and an estimated $4 billion personally for Tepper, making him the highest-earning hedge fund manager of 2009.  He did this by betting against the very panic that was simultaneously driving everyone else into Treasuries at 2%.

Treasuries Did Their Job in 2008

Mistaking the two is how an entire generation of panicked investors locked themselves into the worst decade for fixed income returns in modern financial history, congratulating themselves the entire way down for having been prudent, while Tepper, Buffett, and anyone willing to buy distressed corporate credit at 2,000 basis points over Treasuries spent the following decade counting a return the Treasury buyers structurally could not access.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code