The modern nature of financial flows have strong aspects of a closed system. Funds move from banks, to bond markets, to derivatives and through the Forex markets with barely time to breathe. Consequently, the German bond market’s yields have recently been driven down by an influx of financial flows from investors deeming that other Eurozone markets are too risky at their price. German 10-year paper was offering just 1.13% on June 1st. The irony of the phrase ‘as safe as houses’ should not be lost on these investors.
Indeed, this sentiment seems to have permeated the markets – even despite (maybe even because of (?)) more action from the Eurozone’s decision makers in offering €100 billion to Spanish banks, on June 10th, and a positive result in the Greek elections on June 17th, 10-year Bund yields have nevertheless risen up through the 1.6% mark in recent days. Maybe it is time to sell.
Certainly, many commentators think that the Eurozone crisis is yet to even get underway, and forecast that the sovereign debt problems could take as long as 2 decades to sort out.
The incredibly low yields pf German bonds remain a good short – the artificial depression is not an accurate valuation of the German government’s potential exposure to the sovereign debts held by the other members of the Eurozone, for which Germany are likely to have to fund, in part. Few will argue with the proposition that the German fiscal position can only deteriorate.
The next question for money managers, then, is where next will the money flow to? Robert Jenkins, a member of the Bank of England’s as quoted by this FT Alphaville article, thinks that the current safe havens actually lie outside the single currency – “Have you tried to buy a flat in London lately? You have competition. Property agents openly refer to the ‘Bank of Belgravia.’ Want to open an account in Lugano? Get in line.”
Correctly predicting the next step in this cycle could reap rich dividends.