Tuesday, August 14, 2012

Credit risk versus flight to safety - bunds are not safe

One of the only ways to solve the EU crisis is to have Germany buy more bonds from weaker countries like Spain. The pressure on Merkel to save the euro is intense and it will have to be at the expense of the German balance sheet. This will weaken the finances of Germany. Those who have taken flight to bunds in order to protect their wealth will be ones who take on the greater credit risk. There has been no risk premium

German 2yr yield = -.04
German 3yr yield = .002
German 5yr yield = .377

Smart money will be will to look elsewhere for yield even with currency risk. Who wants to hold 3-year German bonds at zero when the world is still uncertain. 

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