The REAL Story Of What's Happening To Government Bond Markets Around The World


Government Bond

Yields are shooting higher in Spain and Italy this morning, but actually that obscures the truth about what's going on in the government bond department.

The fact of the matter is that yields are plunging left and right.

    The yield on the U.S. 10-year bond has just fallen below 1.7 percent. UPDATE: the yield has just hit 1.6713 percent, a brand new record low.
    In Germany, the 10-year has fallen to a new record of 1.33 percent. UPDATE: And the German 2-year bond yield has now just fallen to ZERO.
    U.K. borrowing costs have hit a record low of 1.73 percent.
    In Finland, the yield on the 10-year is 1.624 percent. You guessed it, that's a record low.
    Sweden: The 10-year yields 1.405 percent. Same deal.
    In Australia, the 10-year has dropped close to a record low of 3.061 percent.
    Canadian 10-year yields at 1.87 percent are close to a record low.
    Japan's 10-year: 0.85 percent.
    Swiss 10-year: 0.59 percent.

Get the point?

All around the world, people are clamoring for the safety of government debt.

With rare exceptions, falling yields are a bad sign, not a good sign. They're indicative of people not seeing growth in real investments and instead preferring fixed government paper.

The one thing that all of these countries (almost) have in common is their own printing press for currency. The one exception is Finland (a model of fiscal health). Since Germany controls the ECB, we're going to argue that they're included in countries that have their own currency.

Unfortunately, most people look at Spain and Italy and Greece, and make big sweeping comments about how governments are at the end of their rope. It's just not the case. In the desperate search for a safe return on capital, people have never been more eager to give governments their money.

And furthermore, this unfortunate extrapolation from a few weak apples is leading to some poor policy mistakes, where governments that should be spending are doing the exact opposite.