Those familiar with the shell game or three card monte are aware that in order to keep the game going new players with new money are required to enter.
In the world of global finance a wide array of iterations of these games are being played literally each and every trading day. Who often plays the role of both dealer and participant? The central banks.
Without these entities involved in the markets, there is no doubt that interest rates would be substantially higher than current levels. The critically important questions facing all investors are the following:
1. When do rating agencies downgrade sovereign debt?
2. How far do the rating agencies go in downgrading the sovereign debt and over what time period?
3. How much “increasingly worthless” fiat currency will central banks print to monetize their debt?
4. When do investors just walk away and effectively say, “we are no longer playing”? In the process, how high will interest rates rise and how will the sovereign entities fund themselves?
Be mindful that the games currently being played can last a very long time. Patience is not only a virtue but also a requirement while navigating this slope along our economic landscape.
Do not look for those covering the markets to aggressively highlight the risk within point number 4 but rest assured the risks and implications of failed government bond auctions are very real. We recently witnessed just such a situation. What country failed to sell its desired size of government bonds? A peripheral nation in Europe? Nope. None other than Germany had a failed government bund auction. Reuters provides further highlights on this development in writing, Investors Balk at Low German Yields, Bunds Fall,
LONDON, April 11 (Reuters) – Bund futures fell on Wednesday as record low auction yields for Germany’s new 10-year bond illustrated the limits of investor appetite for ultra-low yielding debt. . .
German 10-year yields rose 7 basis point to 1.71 percent, climbing away from the record low of 1.637 percent that was matched in the previous session. The country’s debt sale failed to draw bids worth the full amount on offer, though the result was not as poor as that seen last November when the previous Bund was launched.
A German 10 year at 1.71%. A 10 year U.S. Treasury at just above 2.0%. Value? In a world in which our central bankers practice financial repression, the question of value has been rendered meaningless.
While central bankers play their games, the key question all investors face is one of finding meaningful returns and protection. I would maintain that in the arena for government bonds circa 2012 there is little of the former and a decreasing amount of the latter.
I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.