Who said there was no such thing as free money?
The flight of capital in global markets has become so extreme that you actually have to pay to park your money in Switzerland, in Swiss sovereign bonds that is.
While bonds around the world offer a yield, a return on investment, the picturesque tax haven in the middle of Europe now boasts a ”negative yield” on its sovereign debt.
Putting this in perspective, the yield on a Greek bond is 30 per cent – compared with below zero. And it still looks pricey.
The countdown is on for the Greek elections this Sunday. And as the world contemplates a possible Hellenic exit from the eurozone, or a ”Grexit”, as market parlance would have it, the region’s bond markets have hit their tipping point once again.
Sharemarkets, having briefly and perversely rallied on news of the €100 billion ($125.6 billion) bailout of Spain’s banks early this week – something that should have been bad news as Spain had been consistently denying its banks needed help – fell on Tuesday but recovered last night.
When the sharemarket and the bond market start telling you different things, though, it is usually the bond market which has it right. Equities are plodding along yet bonds are warning of danger ahead.
It may be that the strength in equities is precisely due to the fact that bond yields in what are deemed the safer countries are so low (about 1.65 per cent in both the US and Britain and 1.2 per cent in Germany).
And it may also be that investors are simply fed up with super-low yields. At least quality industrial shares carry a decent dividend yield, albeit with less security and greater exposure to economic downturns than bonds.
The third point in favour of shares is, as many see it, the inevitability of further radical central bank stimulus: money printing, QE3, LTRO, assorted programs to appease equity markets and ”kick the can down the road”.
This latest pricing in credit markets indicates a law of diminishing returns, though, when it comes to stimulus, and kicking that old can down that old road.
Switzerland, which has retained its currency though the 20-year euro experiment, this week for the first time ever, boasts a negative yield curve on its six-month to five-year paper.
No yield at all in other words – just the ”sleep at night” factor; that if things turned really pear shaped in the impending contagion from a Greek exit and further wobbles in Spain, your money could be parked in Swiss francs until it was safe to bring it out.
However, the amusing paradox is that the Swiss franc protects an investor against a fall in the euro, or a default in a southern European bond, but it also allows the Swiss to pay their own sovereign debt by … you guessed it … issuing more sovereign debt.
There is a catch. Last September, as Europeans were fleeing the euro in the last holus-bolus flight to safety, the Swiss National Bank was forced to peg its currency.
The franc was running so hot that it was threatening to demolish the country’s high-quality export sector and its tourism. After all, why go skiing in Switzerland when to do so next door in Italy, Austria and France was half the price?
The currency fix didn’t entirely quell the tide of capital, though. Hence the negative yield. This week, two-year rates are costing investors 36 basis points.
Meanwhile, below the Pyrenees, Spain’s 10-year debt sank to its lowest price, which means its highest yield, in 15 years at 6.83 per cent.
At that rate, it is too expensive for the embattled government in Madrid to issue bonds and refinance. The cost of Italy’s debt, likewise, became prohibitive, hitting six-month highs above 6 per cent.
The spectre of contagion once again haunts Europe and there is still another $1 trillion to borrow and refinance this year. Italy, the second-largest debtor in the eurozone, has more than €9 billion to raise in the next couple of days.
And as the calls go out from banks and markets for QE3, for another round of free money to prop up stockmarkets, it is ever apparent the benign effects of central bank stimulus diminishes with each program.
More and more people are questioning the Keynesian logic of splashing the cash around. The more compelling logic would be that splashing the cash about has failed. The result has been to pile debt upon debt.
Perhaps when they let Greece go – and it might take Spain and the rest of the periphery to be cleaned out, too – nature and markets can take their course.
In the meantime, if there is another enormous stimulus, it will provide at least short-term relief for the sharemarkets. And for Australia it might turn out to be fleetingly positive, putting a floor under commodity prices as markets opt, however briefly, to park their money in hard assets.