With current rates extremely low, the pain of holding cash at zero yield may be enough to convince investors to take a chance with some of the more battered asset classes. Indeed, most of the best performers in the first quarter fared the worst in 2008.
Take the credit markets, for example. Super-safe Treasury securities ended the first three months of the year down, while mortgage bonds and corporate debt managed gains. Municipal bonds and the high yield sector enjoyed larger positive returns.
Equity returns largely followed this same pattern. Large-cap tech stocks fared the best, managing a loss of only 3% during a tough period for the overall market. Growth stocks dramatically outperformed their value-oriented counterparts. Emerging market returns far outpaced those of developed markets, with the BRIC countries enjoying gains.
This mean reversion, which suggests asset flows from Treasuries to other parts of the yield curve and, at quarter's end, to equities, may be signaling a cautious return to risk taking. This tendency should become more pronounced as the Federal Reserve and Treasury programs aimed at purchasing tainted assets from banks has more time to take effect.
