COUNTRIES SUCH as the United States, Germany and Britain have never found it easier or cheaper to borrow money on the sovereign bond markets than today. Others have never found it harder, and some countries cannot borrow at all. Italy and Spain struggle to raise money at an affordable price while Greece, Ireland and Portugal, faced with a likely boycott by bond markets, were rescued by a bailout programme from the European Union and the International Monetary Fund.
The result is a wide disparity in global bond prices and yields – the interest rate paid to investors. These price differences are hard to justify, in particular the huge variation in bond yields between euro zone countries that share a common currency. Overpriced bonds in the US, Britain or Germany remain in marked contrast to under-priced bonds in some euro area countries. The very confused state of global bond markets defies an easy or a wholly rational explanation. It reflects a range of factors: market uncertainty, nervous investors and above all governments and central banks determined to counter economic recession by means of what has been described as financial repression.
The slowdown in global growth has forced central banks to loosen monetary policy, and to lower interest rates to mitigate the impact of economic recession. That initiative has depressed bond yields and raised bond prices. This has made it cheaper for some governments to borrow, while encouraging – so far without any obvious success – companies to invest. In addition, quantitative easing – money printing in the US and the UK by central banks – has provided an additional stimulus to economic growth, thereby further depressing bond yields and interest rates.
With the economic downturn in its fifth year, a state of prolonged market uncertainty has transformed investor attitudes. This state of affairs has produced a flight to safety and to quality by investors, in the form of US treasuries and German bunds. Investors have become less worried about a return on their capital, and increasingly worried about the return of their capital. In Spain, in the first quarter of this year, €100 billion left the country for financial safe havens. And today’s historically low interest rates have made it harder for pension funds to secure the high investment returns needed to finance future payments. Savers are faced with the future prospect of negative real interest rates, after inflation and taxes, as governments continue to use financial repression to counter economic recession.