subject: Forex : Risk or no crash in the bond market? [print this page] Forex : Risk or no crash in the bond market?
The debt crisis of the states is in everyone's minds. So two days ago, Governor Lorenzo Bini Smaghi, a member of the ECB, warned the markets against an impending debt crisis in many developed countries, taking particular instance the case of the United States who make deal by 2015 to a debt of 110% of their GDP, the same level as Japan. This crisis could, in the words of the governor, paralyze the global economy.
Yet, despite the chopper which is above most Western countries, the bond market, despite some digging of the spreads, is doing quite well in these uncertain times.
Some do not hesitate to see the effect of a bubble that could burst at any time and to exacerbate the current crisis.
However, before turning to a nightmare scenario, it is still necessary to understand the reasons of investor enthusiasm for state obligations. The reasons are simple and can be summarized in three words: risk aversion. Just as investors retreated to the Swiss franc, the dollar or gold, they also choose to fall back on government bonds. Common to all these financial assets is that they are considered safe havens.
All these assets are experiencing upward slope in recent months, reflecting concerns in financial markets. Although the question of the solvency of many states arises, the current policy of the government bond rate still favors the asset. With rates as attractive as 2.7% for the German Bund, or about 2.5% for French and U.S. rates, investors have much to be seduced.
The honeymoon between investors and the bond market is likely to last and most unlikely to turn into financial disaster. Indeed, the rise of sovereign bonds is not considered excessive. For proof, just look for include the evolution of these bonds to changes in shares.The result is clear: government bonds do not outperform relative to equities. Thus, the Bund, core value of the bond market is in line with the DAX.
The only risk to the bond market lies in a reversal of policy by central banks. However, for now, major central banks appear unwilling to change that. Regarding the Fed, the question of a crisis is not even mentioned, while the latest information, the ECB might be interested in strategies to end the crisis only in December.
When the horizon will be thinned, investors will renew with riskier and more lucrative, but it will happen very gradually since the economic recovery should be particularly slow in Europe, Japan and the United States.
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