In the midst of the European sovereign debt crisis, investors are bidding for sovereign debt. On May 24, 2012 the yields on Austrian, Belgian and French bonds plunged to record lows. Earlier in the week, Germany sold zero-coupon bonds. US bond yields are also near their record lows.
On Friday August 5, 2011, Standard & Poor’s cut the credit rating of the United States from AAA to AA. The credit rating of Belgium was cut from AAA to AA on November 25, 2011. France and Austria were similarly downgraded on January 13, 2012. The rating cut is meant to reflect the increased risk of the debt servicing ability of the government. It is supposed to raise the borrowing costs for the issuing government. Somebody forgot to educate the bond market. Only the reverse is happening.
On the eve of US credit downgrade, the yield on 30-Year T-Bond was 3.823%. It touched an all time low of 2.694% on October 4, 2011. Currently it sits at 2.847%. French downgrade was also meant to indicate, like US, that the French debt has also become riskier. Yet, in mid-May, 2012 France sold 3.651 billion euro of its February 2017 BTAN at a record low yield of 1.72%. This was the first French bond auction since the socialist Francois Hollande became President. Earlier in May 2012 too, in the last bond auction before the election, French 10-year bonds advanced in a 7.43 euro offering. Despite Hollande’s detractors insisting that he will take France down the potholed road of socialism, investors still consider the country a safe haven.
There is a ‘disconnect’ in the financial world.
Credit rating system is not a hard science, whereas, fear is emotional driven and security and returns are relative. When credit rating is pitched against fear emotion head-on, like now, fear will win out every time.
The financial crisis in increasing the fear amongst investors and they are seeking returns in an expensive market even when the rating agencies are downgrading these asset class. Despite increasing debt burden, investors still feel secured with major nations the without.
Here is how US 30-year bond yield doing: