Wednesday, July 18, 2012

THE PRICE OF SAFETY

BOND YIELDS TURN NEGATIVE

In today's environment how much would you expect in return for parking your precious savings into banks. 9-10% is the going deposit rate across most PSU and private sector banks. Though adjusted for inflation the total return is a paltry 2-2.5%. We Indians like to complain about the paltry yields they we get on bonds and bank accounts, but it could be worse. Across Northern Europe, yields are turning negative. The German government this week sold two-year bonds with an average yield of minus 0.06 percent. That means the government will give investors back less than they paid for the bonds in two years and won't pay any interest in the meantime. Two-year bonds of Switzerland, Denmark, Germany, Finland, the Netherlands and Austria are also trading with negative yields on the secondary market. But negative yields on longer-term bonds indicate how far investors are willing to go to avoid potential losses on bonds

LOSS OF CONFIDENCE

According to experts the real reason is that investors have lost confidence in banks and governments across the world and are seeking shelter in the so called safe havens. When investors sell bonds, the price of the bonds goes down and the yields go up vice versa when investors buy bonds, the price goes up and the yield goes down. Yields on 10-year Spanish and Italian bonds have risen to the 6 to 7 percent range as investors have fled those countries. Much of that money has moved into bonds issued by nations sucj as Germany, Belgium and Switzerland (which is not part of the eurozone). Some money fleeing Europe has found its way into U.S. banks and Treasurys. To buy U.S. securities, European investors must buy dollars, which exposes them to currency risk. To avoid that, they must stick with euro-denominated bonds, hence demand for German bunds.

Bond Yields across Western European Markets




No comments:

Post a Comment