Bottom line, there is a world awash with government securities that are so keenly sought that for the most part the Yields are less than 1%. In fact almost $20 trillion of government securities are below 1 percent, according to Bank of America data.
This money, helped by excessive currency printing by the US and Japan, is seeking a return on funds (a yield) in the belief that there is relative safety in government backed bonds.
Southern European countries, with massive unemployment and negative growth such as Italy and Spain have 10YR Yields at 3.88% and 4.11% respectively which is well off their highs only 6 months ago. In that 6 month period, nothing has dramatically changed in Europe and indeed has got worse. Yet money, or hot money as its known, is flowing into all different sorts of government securities, resulting in a higher bond prices and hence lower yields.
Some more extreme examples would be Rwanda's $400 million 10 year bonds at 6.875%. This country, less than 20 years ago was a failed, genocide-torn state. Then there's Zambia $750 million bond sale last fall at just 5.625% - they are now ready to offer as much as $1 billion in debt.
There will come a time when this flow of funds seeking the perceived safety of government securities will stop.
Japan's "Abenomics" will have run its course and the Fed's QE "infinity" will be wound back or down. At that point, the exit in the bond markets will be very narrow - like pin-hole narrow.
I ask one question: Would you lend Uncle Sam your savings for 10 years at 1.67% per annum?
By Mark Crosling
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