5 Year German Bond Goes Negative For the First Time
According to an article on ZeroHedge, the German 5 year bond went negative for the first time ever on Friday. This means that investors are paying to invest in the bond. The German 10 year Bond yield also continues to trade lower at .50%. (Source: ZeroHedge 1/02/14)
Bond yields in many parts of Europe have been sinking lower over the past few years yet the economy has struggled to improve. According to data provided by Bloomberg, 10 year bonds in Italy are yielding 1.75%; In Spain they are 1.5%; Portugal is 2.41% and in France yields are .78%.
Do you know anyone who would consider holding a 10 year Spanish bond to maturity for 1.5%? How about in Italy for 1.75% where the banking system is in shambles? Even Greek 10 year yields are low at 8.96% compared with the problems that the country is facing right now.
Interest Rate Cycles Can Last a Long Time
Despite the record low interest rates the economic recovery has been tepid. One of the reasons many experts believe that ultimately the recovery will fail is because any rise in interest rates will result in soaring borrowing costs. This will cripple many countries and corporations who are heavily indebted.
Interest rate cycles can last 30 years or more. The boom in economic activity over the last 30 years in Europe and the US can be directly attributed to governments, corporations and individuals having access to low cost money. However, the low interest rate environment may be coming to an end in the next year or two.
Jim Sinclair has often said that Gold is about debt. Any rise in interest rates is going to increase debts and therefore effect economic growth. So while it appears as though the Central Banks are winning, their ability to indefinitely suppress interest rate will ultimately not succeed.
Investors are Chasing Yield
Savers have been penalized in the current investment climate as most savings accounts are paying little to no interest. As we mentioned above bonds have not been an attractive investment either. Central Banks have encourage and even forced investors into risk assets in order to achieve some kind of return.
Many investment advisors do not like Gold or Silver because the metals do not yield any return. However, in today’s investment markets, having a portion of one’s assets focused on wealth preservation is a vital strategy. Just ask anyone in Russia.
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