Bonds that tie the economy

When talking about sovereign debt most people eyes glaze over. And that is usually the case on a day-to-day basis. Most people know as you get older you move more money into bonds as a safer investment to fund retirement. This is much different from that.

A brief primer: As the price rises meaning more people are crowding into the trade the yield paid for the bond collapses.

Now it can be extrapolated that the yield on both strong and weak sovereign debt is a barometer of fear or volatility.

Now, we look at the German bund market, which is trading at all-time lows, meaning the fear index is at an all-time high.

The 30-year German bund is trading at 0.47%. The 10-year bond yield also hit a new low of 0.080%

German bunds of shorter duration are a negative yields, which means you pay Germany to buy its debt. Highly unusual that a company can issue “debt” and get paid for it by investors.

The Swiss bond market, while not as large as the German market is also experiencing the same inversion.

Now for the why.

The fear of Greek default and exit? The fear of the euro collapsing and these bonds being paid off in deutsche mark? The EU crowding out investors with its QEU policy?

It’s all of the above and investors are looking for wealth preservation not growth, so the fact that a debt payment to an investor would be less than the postage to mail it has little to do with the investment.

End of the story, the bond yields in Germany cannot be construed as a good sign for the global economy. Fear never is.

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