The US bond market was the place to be this week, amid the panic as frightened investors took the long handle to shares and commodities.
What a paradox! The US is in such trouble financially, why would any sane investor want to park their money in US debt? They did, though, in their droves. The US debt market is still the No.1 ”safe haven” destination for capital.
Short-term paper even attracted inverse yields. Such was the frantic rush for a safe place to hide last night that banks were charging customers a fee for parking money in treasuries. In other words, rather than getting a yield on your money you pay a fee.
At least that was the case with short-term money with the Bank of New York. At the long end, a 10-year bond yields only 2.41 per cent. Bear in mind that when it comes to the bond market, prices are the inverse of yields. The prices of all bonds soared on Thursday, driving the yields to their lowest point since the depths of the crisis in 2009.
Although the risk of the US as an investment destination had escalated to new levels, global capital continued to flee into US debt – even as the prospect of the US ever repaying its debts or meeting future obligations becomes more remote.
It is a reflection of how desperate things have become. The conundrum: where to put your money? Sharemarkets are overvalued, especially now that the latest ructions will wreak all sorts of dislocations and earnings forecasts will have to be reined in. Commodities are plunging on the diminishing prospects for global growth and demand. Gold is already sky-high and bond markets are groaning under an ever-rising weight of supply.
Meanwhile the problem for governments is simply having a viable policy to meet the sovereign debt crisis. What is the plan? The massive stimulus programs haven’t worked; all they did was create a mountain of debt. Instead of reviving the world’s economy, governments effectively transferred private sector leverage to the public.
Broadly there seem to be two options on the policy menu. One is the deflation option: let market forces take over, let the defaults begin and provide a social safety net.
The other is the inflation option: keep splashing the cash to reduce the debts to zero. This is clearly the favoured Wall Street option. Wall Street’s proxies in Washington may duly deliver more stimulus: stimulus the public can ill afford – stimulus that could bring about another Weimar Republic – but stimulus that will diminish the size of the debt.
Bear in mind, too, that the once-lauded US Federal Reserve is merely a private entity, controlled by Wall Street banks, which brought on the crisis in the first place thanks to its ultra-low cash rate settings – settings designed to appease the sharemarket and the financial elite.
Then, after the 2008 rout, Washington gave the Fed another $US2 trillion, expanding its balance sheet to buy US government bonds and keep down interest rates.
It is likely that some on Wall Street, and other assorted speculators, even exploited the end of this most recent stimulus plan – the last round of quantitative easing that ended in June – by once again “shorting” the markets to make a profit. The markets have been in trouble every time the taxpayers’ “play money” runs out.
In the lucky country, though, we are fortunate that we don’t have much debt, and very lucky there has been a China boom happening, though for how much longer no one can be sure.
The Reserve Bank’s governor, Glenn Stevens, must be thanking his lucky stars the board opted earlier this week not to increase interest rates again.