Why this once "most secure" investment may soon become one of the riskiest for average investors
If there was any doubt that Western economies are in a bubble in Government debt, that was removed last month when Germany was able to sell half of a 3 Billion Euro 30-year debt offering at, for the first time ever, a NEGATIVE yield. What that means is that anyone who bought was doing so knowing they were CERTAIN to get back less than they paid for the debt if they held that debt to its 30-year maturity. It is also worth noting that the German Bundesbank had to take the unprecedented move of buying near 60 percent of the offering with the rest coming from the European Central Bank (ECB) and buyers betting that they can eventually sell these bonds back to the ECB (or others), before maturity, for a profit.
“If I was back in my trading days, I would certainly avoid sovereign debt and likely short the debt of governments that do not also possess the ability to print their own currencies such as Provinces in Canada and States in the U.S."
Government Bond Bubble About to Pop
In my view, non-governmental bodies making bets of that size on an under-subscribed for offering that, on its face, looks to be a farcical investment would only done if the ECB advised them of a future bond repurchase scheme -- "inside information" if you will at the expense of EU taxpayers – so that whatever the yield, they are going to make more on a capital gain from selling it to a future buyer than lose on the yield. If I was back in my trading days, I would certainly avoid sovereign debt and likely short the debt of governments that do not also possess the ability to print their own currencies such as Provinces in Canada and States in the U.S. In that regard, the most obvious candidate is the State of Illinois as it has been burdened with financial mismanagement common to jurisdictions that have had one-party rule for decades and a State Constitution that makes bankruptcy inevitable by prioritizing the benefits owed to its public sector over the continued ability of its taxpayers to pay as it notes "membership in any [State] pension ... shall be an enforceable contractual relationship, the benefits of which SHALL NOT BE DIMINISHED OR IMPAIRED."
All financial bubbles pop and this one in Government debt will be no different. While you can wait for the last dollar at its top (Austria’s recent 1.25 billion euro ($1.4 billion) sale of 100-year debt priced to yield 1.171% might be it), prudence would dictate that you get out while you can and consider moving those funds to the only vehicle that can absorb the enormous outflow of capital when it does pop -- the US Stock Market.
The above is for informational purposes only and based on my own observations and life experience and does not constitute financial, accounting, or legal advice. If you have any doubts as to the merits of any investment, you should always seek advice from a registered independent financial advisor of which I am not and have never been.