The bond vigilantes are in no mood to sympathise with voters in the eurozone chafing against the strictures of fiscal austerity.
After Greece and Portugal bore the brunt of bond aversion earlier this week, yields turned sharply higher for Spain and Italy on Wednesday. France lagged behind the rise in yields, but make no mistake, the large cross-country bond holdings between these three major members of the eurozone mean they all share the same fate, as the bank capital and sovereign debt crisis enters a potentially dangerous phase.
No surprise then that benchmark 10-year yields for German Bunds and UK gilts fell to record lows, while the US Treasury was set to sell 10-year debt on Wednesday that should sport a record low coupon of 1.75 per cent.
The message from the bond market is clear and trumps the legitimate anger of eurozone voters as they face the prospect of sharply lower living standards.
We are back in an environment where the return of principal outweighs thoughts of an actual return on capital. That entails owning German, UK and US debt, in spite of their very low yields at the relative expense of other assets.
Expect further pressure on equities, corporate bonds and commodities as eurozone policy makers and the European Central Bank have a history of being reactive, and not proactive, when troubles mount.
A policy making void heralds a dangerous period for risk assets and tighter global financial conditions that are weighing heavily on economic prospects.
As the bond vigilantes hunker down, they too face a risk. Policy makers could launch a new round of liquidity measures that soothe the current tension and help risk assets. A bigger concern for buyers of Bunds is that they may suffer should Germany be forced to backstop the eurozone and prevent a disorderly break-up from occurring.
0 comments:
Post a Comment