'Safe havens' starting to look a lot less secure

Continued worries about Spain and Greece, increasing signs that the weak US recovery is getting weaker and indications that the euro area slumps are deepening push down bond yields in perceived "safe haven" countries.

Yves Herman/Reuters
European Central Bank (ECB) President Mario Draghi (l) participates in the European Parliament economic and monetary affairs committee in Brussels in this May 2012 file photo. Continued worries about the global economy are pushing down bond yields, including in perceived "safe haven" countries.

Continued worries about Spain and Greece, increasing signs that the weak US recovery is getting even weaker and signs that the British and euro area slumps are deepening are continuing to push bond yields in countries that are perceived "safe havens" to even more absurdly low levels. There are now three countries (Switzerland, Japan and Denmark)  with 10-year yields below 1%, another four (Germany, Sweden, Finland and the US) with yields below 1.5% and another three with yields below 2% ( Britain, Holland and Austria).

Switzerland 0.52%
Japan          0.82%
Denmark     0.97%
Germany     1.17%
Sweden      1.18%
Finland       1.44%
USA          1.45%
Britain        1.53%
Holland      1.53%
Austria       1.99%

Note that this "safe haven" status is not based on whether a country deserves it or not. British, American and Japanese government finances are messed up badly and of the above only Switzerland and Sweden have balanced budgets and a low debt level, with the remaining five countries coming in between with regard to the strength of their public finances.

Nor is it a matter of whether a country is inside or outside of the euro area, as Germany, Finland, Holland and Austria have the euro as currency and as Denmark is also a part of the euro bloc as its currency have a fixed exchange rate to the euro.

Nor is this status necessarily permanent. 6 months ago, yields were rising significantly in Finland and Austria due to market distress, to 3% and nearly 4% at most, respectively. Yet now yields have been cut in half for both.

Central bank manipulation is however one factor. The ECB's covert "quantitative easing" through banks have for example helped hold down euro area yields generally. Low yields in the U.S. and Britain may perhaps to a small extent be related to expectations of more "quantitative easing". However, if that had been the most important factor, the dollar and the pound would have depreciated in value. Instead, particularly the dollar has in fact appreciated in value, indicating that investor demand for "safe haven" assets is the most important factor.

Instead it seems clear that self-fulfilling whim from the markets is the most important factor. Investors have decided that these assets should be seen as "safe havens" and that is what makes them that. Ironically though, the only thing that's "safe" with most of them is that the people who buy them will lose some of their money, something that given the irrationality of it isn't undeserved.

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