Since the Greek/Euro crises broke out in earnest some time last month, the German Bunds and US Treasuries have seen increasing demand (and falling yields) as people pull out money from “risky assets” and park them into “safe havens”. This has been the typical behavior in all recent panics, but somehow, this time around it makes little sense to me.
US 2-year treasuries are currently yielding about 80 basis points (or 0.8% per annum). Not only is this ridiculously low for ordinary times, it sounds even worse given the extent of Quantitative Easing being undertaken by the Federal Reserve. As the Fed puts more and more money into circulation, I’d expect severe inflationary pressures; or equivalently for international investors, a severe deterioration in the value of the US Dollar. Except against the Euro. Which brings me to the German Bunds. The case of German Bunds is even more baffling. The reason why German Bunds are in favour right now is because of panic for the Eurozone and the Euro itself. In my mind, that is precisely the reason why German Bunds are a bad investment, particularly at low yields of 2.65% p.a. for the 10 year bond. With a currency facing potential deterioration of 20% or more (the Euro hitting parity with the US Dollar is an oft-discussed possibility), why would someone invest in a fixed income security yielding 2.65%? One reason would be that for a lot of institutional investors in the Euro-zone, investing all (or most) of their corpus in European instruments might be mandatory. They have nowhere else to go and so they buy debt from the least-likely-to-default Eurozone country. But what about others? I’d imagine that they should be buying commodities and gold. That is probably the only safe bet at this point.
Gold indeed seems to be attracting massive attention as it reversed it recent short downtrend and is back at $1215 per troy ounce having fallen to $1170. In Rupee terms, the story is much worse with prices reaching new highs of over Rs. 18,600 per 10 grams. It is here that I think there is some madness again. Part of the reason why fresh highs are being made in INR terms is the bulk pulling out of FII investments from the equity market, which is pushing down the INR against the USD. So while I remain bullish on gold in USD terms, I have mixed feelings about it in INR terms, mostly because I see INR weakness as only temporary and would expect a reversal if/when saner minds take over the market and money flows back out from the insanely over-priced US treasuries and returns to economies where genuine growth is taking place and long-term investors can get the biggest bang for their buck.
Of course, I don’t expect sanity to return too soon and I’d expect to see the INR trade atleast between 49-50 to the Dollar before money flows back in.