Frenzy and illusion


As bond market investors grapple with fiscal crises and seek safe havens, John Gilbert, chief investment officer at GR–NEAM, looks at the trends he sees emerging in a world where governments will not always step in as lenders of last resort.

The insolvency of Lehman Brothers has become a fault line in financial history. The failure of the US government to act as lender of last resort in Lehman’s insolvency was a deflationary shock unlike anything in decades. Now, in Europe, if Germany were to disavow contingent liability for deeper eurozone union, there is the growing risk of a second large defl ationary shock in just five years.

The result is a developing craze for safety in the markets. Fear of loss of principal has so galvanised investors that they recently awarded Germany and France negative nominal yields in short-term government bill auctions. Those governments are now custodians and not borrowers—lenders have become clients and are paying them for holding their capital in safekeeping.

In addition, US 10-year bond yields fell below 1.5 percent in July. The US, for all its foibles, is viewed as one of the safe havens, and this should remind America of why Europe matters. The US is one of the principal benefi ciaries of capital flows away from risk in the eurozone. US government bond yields have been cut in half in just 12 months.

Reinsurance, Insurance, Capital management, GR-NEAM

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