The universe for safe-haven assets is shrinking fast.
A sell-off in German government bonds after a weak auction, a warning on France's triple-A rating and rising risks on U.S. credit after the collapse of deficit talks spell trouble for investors looking to find a safe harbour to protect their capital from the escalating euro zone crisis.
They had already turned their focus away from gold -- coming under pressure as hedge funds were forced to sell to meet redemptions -- and the Swiss franc after an exchange rate control imposed in September to stop the traditional safe-haven currency from appreciating.
"There has been a lot of talk about what a safe haven is. What's interesting is you have crowded trades in safe havens just as we have crowded trades in other asset classes. Safe-haven isn't necessarily a low-volatility investment," said David Miller, partner at Cheviot Asset Management.
Political and debt market events in the coming week are likely to test that premise further.
"Safety is diversification. There is no one answer to those who want safety. If you have a balance of different assets, you build in a margin of safety," Miller added.
He said an example would be holding a selected number of government bonds in the United States and Britain along with companies with sound balance sheets paying good dividends.
The sell-off in German bonds highlights the danger of putting all your eggs in one basket.
"As a result of Bunds increasingly losing their safe haven status the euro is increasingly affected by the crisis, as it means that no euro-denominated safe haven is available," Commerzbank said in a note to clients.
"In 2008/2009 Bunds were one of the three forms of investment which remained stable and liquid during the pronounced crisis. Anyone expecting that to be the case again so far did not have to reduce their EUR positions despite the crisis. This point of view will have to be reconsidered though."
SAFETY AND YIELDS
U.S. President Barack Obama, European Council President Herman van Rompuy and European Commission President Jose Manuel Barroso meet on Monday in Washington, where Europe's response to the two-year crisis is expected to top the agenda.
Also in the coming week, France, Britain, the United States, as well as Italy, Belgium and Spain are holding debt sales, with concerns over the appetite for triple-A paper a key issue after the disappointing German auction on Wednesday.
Berlin's debt agency failed to find buyers for almost half a bond sale of 6 billion euros , pushing Germany's borrowing costs over 10 years above those of the United States for the first time since October.
Even as world stocks slid to seven-week lows on Friday, German government bonds failed to attract safe-haven flows .
The underperformance of Bunds in the past week has left them yielding almost the same as UK 10-year gilts and around 20 basis points more than U.S. Treasuries .
But gilts are not without risks, with UK economic growth stagnating and the unemployment rate at a 15-year high of 8.3 percent.
UK finance minister George Osborne delivers a budget statement on Nov 29 to parliament including new forecasts for growth, inflation and public finances.
Aside from the safe-haven allure, investors are increasingly being put off by the negative real yields that such paper offers.
German, U.S. and UK 10-year real yields -- benchmark government bond yields minus consumer prices inflation rate -- are in negative territory, with Japan boasting the highest real yield among the four of around 1 percent.
Even on a nominal yields basis, Switzerland already offers negative yields -- meaning that investors must pay for the privilege of parking cash in safer markets. Singapore also experienced negative rates earlier this year.
EuroSwiss interest rate futures currently imply a negative rate lasting until as late as June 2013.
And the escalating tensions in the funding market -- with the cost of swapping euros for dollars hitting a three-year high
"Investors shouldn't forget that the reluctance of banks to lend to each other because of their holding of sovereign debt is now imposing a tightening squeeze on banks themselves. That's what caused a problem after the Lehman bankruptcy. We're starting to see signs of that developing in Europe," said John Greenwood, chief economist at Invesco Limited.
"The euro zone crisis will rumble on and we will have a risk-on and risk-off and it's very difficult to focus on a single strategy."
(Editing by John Stonestreet)