European Options

What’s up with government bonds?

On the face of it, global bond yields appear to be at crazy levels. Ten-year government bonds vary from insanely low levels, like Japan and Switzerland at less than 1%, to Italy and Spain near 6% or even 7%. In the middle are the US and the UK, with their ten-year bonds yielding around 1.5%, even as long-term inflation runs around 2-2.5%. It looks like investors are paying their governments for the privilege of parking their money.

So is this a free lunch for the favored governments? Short-term bonds really look like a free lunch: Japanese yields are virtually zero, and Swiss two-year bonds actually have a negative nominal yield of -0.50%.

It’s tempting to just say this is nuts and walk away, but we’ve actually seen this sort of thing before. In the late ‘80s and early ‘90s very short-term yields went wild in Europe because currencies were under attack. Member currencies traded within narrowly defined bands, and when there were expectations that a band would be adjusted, short-term deposit rates would either soar or crash, depending on whether speculators were going short or long that currency.

The same thing is happening now. So if you take the US, UK, and Canada–large, diversified economies that manage their own money supply–as neutral, their five-year bonds yield between 0.5-1%. Below that are Switzerland and Japan, whose currencies are widely expected to go up. And above that are the peripheral European nations—Italy, Spain, and Portugal—which may have to leave the Euro and go back to having their own, depreciating currencies.

An appreciating currency is hard for an economy to swallow, just as depreciating currencies punish investors and savers. There’s still no free lunch.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By |2014-09-09T15:53:17+00:00June 19th, 2012|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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