Yield Chasing Continues

Investors Warm to Spanish, Italian Debt – WSJ.com.

Central bank easing continues to work its magic. Yields have been pushed so low that investors are taking on huge amounts of risk to earn money on their savings. Witness the PIIGS bond rally since July.

The rally masks an important fact. These countries are all on the road to default. One market analyst tells us “if market conditions stay where they are, Spanish and Italian bonds offer an attractive return.” He just said that as long as the bond bubble continues to inflate you should make money.

Eventually market conditions will change. There is always a lag in the market relaying the true economic conditions underlying the securities, but reality always sets in.

One tell-tale sign of a market panic in the making is the assumption by players that some external force will not allow the markets to drop, aka the Greenspan Put. Here, we have the ECB put expressed thus by Nick Griffiths from Legal and General, “It will be a long process but we are still confident in the ability of European policy makers to step in in times of trouble.”

Basically, Mr. Griffiths believes that bond price cannot really drop anymore.

What is really occurring is that the ECB is placing trillions of euros to the financial markets to support otherwise insolvent banks. These banks are taking the money at 1% and buying PIIGS sovereign bonds at over 4%. Insolvent banks are supporting the insolvent sovereigns.
This is a giant money merry-go-round, and the ride will end sooner or later.



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