Bond rates are falling as investors around the world are seeking to park their capital in “haven” countries. German two year note rates have fallen to zero percent, with investors willing to sacrifice returns in exchange for the security provided by the German government. Bond rates in Japan have fallen to a record .81 percent. Even the United States, which has been hit by a wave of poor economic data and impending “taxmageddon”, is seeing a low rate of 1.53%. Whether or not another world-wide recession will materialize remains to be seen, but many investors now feel it’s simply not worth the risk.
These so-called “haven countries” are considered safe places for investors to park their money and weather any global downturn. Germany is seen as the far and away leader of the European Union, both fiscally responsible and economically strong. Switzerland, Singapore, and Canada enjoy a similar position, due to their strong economies being coupled with manageable debt.
Many of these bonds will offer little-to-no returns, so why park them there in the first place? Part of the problem rests in the perceived ill-health of many financial institutions around the world. With each morning seemingly bringing more headlines about a major banking needing a bail-out or rescue, investors are worrying that banks may not be the safest place to make a deposit. Add in slow hiring around the world and plummeting GDP growth rates and investors have plenty to worry about.
For the cautious and pessimistic investor, a perfect storm seems to be brewing. The Eurozone is one the verge of collapse, oil prices remain stubbornly high by historical standards, and the world’s two largest economies, China & the United States, have released a torrent of poor economic data.
The European Union is the elephant in the room. Collectively, the European Union is the largest economy in the world weighing in at USD 17.69 Trillion. And while some nations have been performing admirably, years of lax spending and loan policies combined an increasingly uncompetitive economy have resulted in heavily indebted nations and overextended banks, including Greece and Spain.
China has been hit by a barrage of bad data. The manufacturing sector is down. A financial bubbling may be ready to implode as loans given freely and loosely by companies and banks alike are now coming due and many debtors may be unable to pay. Chinese factory output is weakening and GDP growth rates are projected at only 8 percent, vs. 10.2 percent in 2010.
The United States had been one of the few bright spots in recent months. The economy has been growing even in the face of risks from a Eurozone crisis. The unemployment rate had been dropping steadily until three months ago, but is now stuck at about 8.2 percent. College graduates are entering the best job market in the last few years.
Yet with another political battle over deficit spending, tax cuts, a still growing national budget, and poor world outlook even the USA is at risk of slipping back into recession. Few observers believe there is enough political willpower in Washington to resolve party differences and address the coming “taxmaggedon” set to occur at the end of the year when tax-rates will rise and Pentagon spending will plummet without Congressional intervention.
What will happen in the coming months? It is difficult to forecast but investors are voting with their money. With so much risk on the horizon many are willing to sacrifice returns entirely for the safety of sovereign debt in “haven” nations.