Thursday, May 31, 2012

Headed for Davy Jones' Locker


Yield on 2-yr. Swiss notes
[courtesy ZeroHedge]


Yields on 2-year Swiss notes have gone negative in a big way.  As ZeroHedge points out, you can now pay the Swiss government 26 basis points to borrow your money.

Why would you do that?

You would if your currency is losing value against the Swiss franc.  And right now the currency of almost two dozen European nations--the euro--is sinking fast.  Switzerland is an island of prosperity in the turbulent European waters and historically a safe haven for scared money.  We have observed that capital is fleeing the beleaguered peripheral nations (Greece, Spain, et al.).  Now we know where a lot of it is going.  The Swiss National Bank has said that it will defend the euro (the Wall Street Journal explains here).  But the chart above (remember, bond yields are inversely related to demand) reveals a widespread belief that the SNB will be unable to hold the fort.


[update, 06-01-12--]


Scared money is also finding its way into German bonds; the two-year yield went negative today.  As David Rosenberg at Gluskin Sheff points out, "the front end of the German curve is seeing huge inflows of euros from the dilapidated banking systems in the south." Rosenberg's recap is a useful primer for uninformed castaways curious about what has been happening in the global economy recently.


John Mauldin, in his weekly newsletter, explains why investors are willing to bid bond yields below zero:
"Buying German bonds, even at a slightly negative rate, is actually a cheap call option on the eurozone breaking up. A German bond that became a new Deutschemark-denominated bond would rise in value at least 40-50% almost overnight."



The Euro: now worth $1.24 and plunging.


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